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IMF Executive Board Concludes 2020 Article IV Consultation with Panama

March 26, 2020

The Staff Report was prepared by a staff team of the IMF for the Executive Board’s consideration on March 24, 2020. The staff report reflects discussions with the Panamanian authorities during February 4-17, 2020 and is based on the information available as of February 21, 2020. It focuses on Panama’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in Panama and globally.

On March 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Panama and considered and endorsed the staff appraisal without a meeting. [2]

After a decade of high growth, the economy slowed in 2018–19 and growth is estimated to have reached 3.0 percent in 2019. Inflation slid below zero for most of the year due to soft demand, while credit growth decelerated. The unemployment rate rose slightly to 7.1 percent in August 2019, compared to 6.0 percent the previous year. However, economic activity remained subdued despite copper exports, which helped to narrow the external current account deficit to 5.2 percent of GDP. Confronted with a sharp revenue shortfall in mid-2019, the new government decided to revise the fiscal rule widening the deficit ceiling of the non-financial public sector to 3.5 percent of GDP (from 2.0 percent in 2018), and gradually adjusting it in subsequent years. In the event, the fiscal deficit amounted to 3.1 percent of GDP in 2019, which together with the uncovering of previously unrecorded arrears of over 2 percent of GDP, increased central government debt to 46.2 percent of GDP (although still below historical levels). Panama was placed on the FATF grey list in June 2019, with limited impact on the economy and the banking system thus far, and the government has initiated reforms to address the remaining deficiencies in AML/CFT.

For 2020, the deficit will likely surpass the limit under the fiscal rule of 2.75 percent of GDP as there will be a need to support the economy and increase public health spending in view of the current situation with COVID-19.

Executive Board Assessment [3]

In concluding the 2020 Article IV Consultation with Panama, Executive Directors endorsed staff’s appraisal, as follows:

Growth is expected to rebound in 2020. Economic activity is projected to recover after a slowdown in 2018-19, supported by full-scale copper production and robust private investment. Growth over the medium-term is expected to remain at its potential. Key risks relate to setbacks in exiting the FATF grey list and complying with SFRL deficit ceilings as well as a slowdown in Canal traffic amid escalating trade tensions, weak growth in key trade partner countries, and the coronavirus outbreak. While external imbalances are expected to decline over the medium-term, the external position is moderately weaker than fundamentals and desirable policy settings.

Sustained fiscal discipline is required for fiscal policy credibility and to keep public debt on a downward trajectory. Amid a relatively high deficit exacerbated by newly discovered unrecorded arrears, Central Administration debt reached 46.2 percent of GDP in 2019. The modified gradual adjustment of the deficit ceiling under the SFRL is appropriate to smooth the pace of necessary fiscal consolidation. In addition, the authorities should consider using a “shadow” structural rule in the future to build fiscal buffers.

A realignment of fiscal revenue and expenditures is imperative to sustain growth. In addition to improving the capacity of tax and customs administrations, action is required to review Panama’s complex tax exemptions that continually erode the tax base. On the expenditure side, realigning current spending with social needs—including by investing more in education—and improving the effectiveness of social spending will be crucial to achieve sustainable and inclusive growth. Capital projects need to be carefully assessed and prioritized going forward.

The pension system needs to be strengthened. Faced with slowing population growth, the authorities need to gradually align pension contributions with expected payouts, to avoid creating an undue burden to the public finances in the long run. Given the politically sensitive nature of such adjustments, a slow-paced approach is recommended.

Strengthening the fiscal framework is essential to improving the macroeconomic policy toolkit. The emergence of sizable unrecorded arrears highlights the need to strengthen budgetary execution rules and misuse penalties as well as to streamline the recording of fiscal accounts by limiting the use of turnkey projects and deferred payment contracts in public investment projects.

Exiting the FATF grey list must remain a priority. Building on the momentum of recent legislative action, the authorities should continue addressing the deficiencies in Panama’s AML/CFT regime and legal framework identified by the FATF. In addition, the authorities should address the shortcomings identified in the 2019 Global Forum review on global tax transparency, including by responding to exchange-of-information requests in a timely manner.

The financial sector remains robust, but macrofinancial risks warrant continued monitoring. Addressing data gaps with respect to household and corporate balance sheets and property

prices remains a priority. Specifically, improving housing price indices would facilitate financial-sector surveillance.

The alignment of prudential regulations with Basel III is welcome. The authorities should focus on macroprudential tools and further upgrading the regulatory toolkit. It will also be important to put in place robust frameworks for crisis management, including by adequate liquidity support for banks and enhancing the range of resolution tools available to failed banks.

The fintech sector holds potential in the presence of an appropriate regulatory framework. Adopting cybersecurity and fintech regulatory frameworks while capitalizing on Panama’s digital and mobile connectivity could place the country as a regional fintech hub, enhancing financial inclusion, and lowering intermediation costs.

A reinforcement of the structural reform agenda will be necessary to maintain high potential growth. Sustaining high rates of growth will require continued improvements in productivity and competitiveness, a strengthening of policies related to labor mobility, governance and institutional capacity, and enhancing the innovation and technological sophistication in key industries. To remain an attractive destination for doing business, Panama needs to upgrade the skill level of its workforce, streamline the insolvency framework and improve the functioning of the judicial system.

Addressing social inequities is urgent. Revamping social policies is imperative to maintain broad-based and inclusive growth and requires strategic policy action in the areas of education, gender equality, social protection programs, and poverty reduction in the comarcas.

Panama’s climate change mitigation strategy and commitments are welcome. Beyond “green” energy provision, the authorities should be mindful of natural resource preservation, especially in view of the country’s susceptibility to extreme weather events. Most notably, the pressure for better water management is mounting both from the expanded Canal operations and a growing population.

Table 1. Panama: Selected Economic and Social Indicators

Population (millions, 2018) 4.2

Poverty line (percent, 2017) 20.7

Population growth rate (percent, 2018) 1.6

Life expectancy at birth (years, 2017) 78.1

Total unemployment rate (August, 2019) 7.1

Adult literacy rate (percent, 2018) 95.4

GDP per capita (US$, 2018) 15,507

IMF Quota (SDR, million) 376.8

Est.

Projections

2016

2017

2018

2019

2020

2021

Production and prices

(Percent change)

Real GDP (2007 prices)

5.0

5.6

3.7

3.0

4.0

5.0

Consumer price index (average)

0.7

0.9

0.8

-0.4

0.5

1.5

Consumer price index (end-of-year)

1.5

0.5

0.2

-0.1

1.0

2.0

Output gap (% of potential)

-0.1

0.8

0.3

-0.7

-0.9

-0.4

Demand components (at constant prices)

Public consumption

10.1

6.5

7.5

8.7

2.1

5.7

Private consumption

7.1

3.1

2.3

3.0

3.2

5.0

Public investment 1/

49.0

-20.7

7.0

-5.2

1.1

5.8

Private investment

-5.5

14.9

-0.1

-3.7

1.5

6.1

Exports

-4.3

5.0

5.0

-0.3

7.2

6.5

Imports

-4.8

4.7

2.8

-2.7

4.0

7.3

Financial sector

Private sector credit

8.4

6.5

4.5

0.2

4.6

6.6

Broad money

4.1

5.2

2.8

-0.1

4.6

6.6

Average deposit rate (1-year)

2.7

2.7

3.5

3.9

Average lending rate (1-year)

3.5

3.5

4.3

4.7

Savings-investment balance

(In percent of GDP)

Gross domestic investment

40.5

41.7

41.3

38.4

38.6

38.2

Public sector

7.8

5.9

6.1

5.2

5.0

5.0

Private sector

32.7

35.8

35.2

33.2

33.6

33.2

Gross national saving

32.7

35.8

33.1

33.2

32.0

31.9

Public sector

3.9

4.2

4.2

2.5

2.6

2.9

Private sector

28.8

31.5

28.9

30.7

29.4

29.0

Public finances 1/

Revenue and grants

22.6

22.0

21.9

20.8

20.4

20.7

Expenditure

24.8

24.2

24.8

23.4

22.8

22.8

Current, including interest

16.7

17.0

17.1

17.8

17.5

17.5

Capital

8.0

6.9

6.5

5.6

5.3

5.3

Overall balance, including ACP

-2.2

-2.2

-2.9

-2.6

-2.4

-2.1

Overall balance, excluding ACP

-2.0

-2.2

-3.2

-3.1

-2.7

-2.5

Total public debt

Debt of the Non-financial public sector 2/

34.8

34.8

36.8

41.0

42.1

42.1

External

28.5

28.7

30.5

34.9

35.3

34.7

Domestic

6.3

6.1

6.2

6.1

6.8

7.4

Debt of ACP

4.7

4.4

4.2

3.9

3.6

3.2

Other 3/

3.8

3.4

4.2

4.1

3.9

3.7

External sector

Current account

-7.8

-5.9

-8.2

-5.2

-6.1

-5.9

Net exports from Colon Free Zone

2.9

3.0

2.5

1.5

1.4

1.5

Net oil imports

3.4

3.8

4.4

3.7

2.6

2.6

Net foreign direct investment inflows

7.9

6.9

7.9

6.3

5.1

5.0

External debt

159.9

149.6

151.8

156.5

160.2

160.0

Memorandum item

GDP (in millions of US$)

57,908

62,219

65,128

66,801

69,850

74,443

Sources: Comptroller General; Superintendency of Banks; and IMF staff calculations.

1/ Includes Panama Canal Authority (ACP). Includes Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18.

2/ Non-Financial Public Sector according to the definition in Law 31 of 2011.

3/ Includes debt of public enterprises outside the national definition of NFPS (ENA, ETESA, and AITSA) and non-consolidated agencies.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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