IMF Executive Board Concludes 2021 Article IV Consultation with Panama

Washington, DC : On June 14, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama. [1]

Panama’s economy contracted sharply in 2020 against the backdrop of reduced mobility and measures to address the COVID-19 pandemic, along with the global recession. Real GDP growth contracted by an unprecedented 17.9 percent in 2020, and the unemployment rate rose sharply to 18½ percent in September 2020. A sharp loss of revenues due to the lockdown and associated demand effects also precipitated a marked deterioration in the fiscal position, while COVID-related spending in health and social programs was broadly offset by a reorientation of other expenditure. The nonfinancial public sector fiscal deficit swelled to about 10 percent of GDP, but remained in line with the amended fiscal rule. The external current account improved to a surplus of 2⅓ percent of GDP in 2020, on the back of a sharp contraction in imports, lower oil prices, as well as increased copper exports and resilient canal revenues. The financial sector remained stable, well capitalized, and liquid despite the large pandemic shock and moratorium on servicing bank loans. Panama remains on the Financial Action Task Force (FATF) grey list. While the FATF acknowledged the actions taken by the authorities in improving the AML/CFT regime in the recent February 2021 Plenary, progress was not sufficient to remove Panama from the list of countries with strategic deficiencies. The FATF noted that the timelines for implementing all items of the FATF action plan had expired and encouraged Panama to address remaining deficiencies as soon as possible.

While a strong recovery is expected for 2021, the balance of risks remains tilted to the downside. Growth is projected to recover to 12 percent in 2021 and converge to its potential of about 5 percent over the medium-term. However, the economic outlook continues to be subject to an unusual degree of uncertainty arising from the impact of the pandemic. Domestic downside risks include delays in addressing the items contained in the FATF’s Action plan and improving the effectiveness of the AML/CFT regime and tax transparency frameworks; increase in NPLs from the moratorium on servicing bank loans; setbacks in fiscal consolidation which jeopardizes market confidence. External risks include new pandemic waves, and continued weaknesses in global trade curtailing traffic flow and revenue from the Canal. In addition, natural disasters and extreme climatic events could lead to loss of lives and livelihoods, and disrupt canal activity, agriculture, and tourism.

Executive Board Assessment [2]

Executive Directors broadly agreed with the thrust of the staff appraisal. Panama experienced a pronounced economic contraction in 2020 amid stringent containment measures and mobility restrictions to tackle the COVID-19 pandemic. A rebound in the global economy and supportive macroeconomic policies are expected to underpin a strong recovery in 2021. Directors commended the authorities’ commitment to protecting the health and lives of Panamanians through a vaccination program. They emphasized the need to remain cautious as global uncertainties remain, particularly from the emergence of new COVID-19 strains.

Directors underscored the importance of adhering to the fiscal rule to ensure debt sustainability in the medium term. The envisaged post-pandemic fiscal consolidation effort should be accompanied by strengthening medium-term planning. Directors highlighted the need to strengthen the fiscal framework to improve the credibility of the fiscal strategy and refine the public financial management framework to bolster transparency and prevent the resurfacing of arrears.

Panama’s banking system remained resilient during the pandemic, and is generally well-regulated. However, the financial system is still vulnerable to unanticipated shocks. Tight supervision and monitoring are needed to safeguard stability. Directors stressed the need for the regulatory forbearance granted on loans following the pandemic to be restricted and phased out, reinforced by a supervisory action plan and close monitoring. The ad hoc provisioning requirement on modified loans should continually be recalibrated to evolving circumstances. Given the large share of modified loans, a risk-focused loan portfolio examination of all banks, including an assessment of fundamental asset quality, would help assess banks’ credit exposures and capital buffers.

Directors emphasized the importance of improving the financial integrity framework. Exiting the FATF grey list must remain a priority, including by expediently addressing the remaining deficiencies in the AML/CFT regulatory framework. Efforts to further enhance tax transparency should continue, in close cooperation with the European Union.

Directors called for structural reforms to enhance competitiveness and growth potential through improvements in the business climate, strengthening policies related to labor mobility, governance and institutional capacity, enhancing innovation and technological sophistication in key industries, and deepening financial inclusion. There is also a need to upgrade workforce skill levels, streamline the insolvency framework and improve the functioning of the judicial system to remain an attractive destination for doing business. Directors welcomed the long-term goals of enhancing the efficiency of spending, particularly in health, education, and social areas, including improving the living conditions of indigenous populations.

Table 1. Panama: Selected Economic and Social Indicators

Population (millions, 2020) 4.3

Poverty line (percent, 2017) 20.7

Population growth rate (percent, 2020) 1.4

Life expectancy at birth (years, 2018) 78.3

Total unemployment rate (Sep, 2020) 18.5

Adult literacy rate (percent, 2018) 95.4

GDP per capita (US$, 2020) 12,373

IMF Quota (SDR, million) 376.8

Est.

Projections

2017

2018

2019

2020

2021

2022

Production and prices

(Percent change)

Real GDP (2007 prices)

5.6

3.6

3.0

-17.9

12.0

5.0

Consumer price index (average)

0.9

0.8

-0.4

-1.6

0.2

1.1

Consumer price index (end-of-year)

0.5

0.2

-0.1

-1.6

0.5

2.0

Output gap (% of potential)

2.4

4.4

7.3

-14.2

-6.3

-4.3

Demand components (at constant prices)

Public consumption

6.4

7.7

4.5

19.1

6.2

-11.2

Private consumption

3.1

2.3

3.6

-15.7

12.3

4.5

Public investment 1/

-20.7

6.9

-1.6

-19.7

4.0

3.0

Private investment

14.9

-0.4

-2.8

-40.0

33.7

12.4

Exports

5.0

5.1

-0.1

-28.3

15.3

11.0

Imports

4.3

4.1

-3.3

-34.0

34.0

6.5

Financial sector

Private sector credit

6.5

4.5

2.4

-2.6

12.3

6.1

Broad money

5.2

2.8

2.3

9.5

15.2

7.1

Average deposit rate

1.6

1.8

2.1

1.9

1.6

1.6

Average lending rate

7.9

7.7

7.9

7.8

6.2

6.2

(In percent of GDP)

Saving-investment balance

Gross domestic investment

41.7

41.5

39.3

28.5

32.5

34.3

Public sector

5.9

6.2

6.0

5.3

5.0

4.9

Private sector

35.8

35.3

33.2

23.2

27.6

29.5

Gross national saving

35.8

33.8

34.3

30.9

29.1

31.0

Public sector

4.2

4.2

2.7

-4.1

-2.8

1.2

Private sector

31.6

29.6

31.6

35.0

31.9

29.8

Public finances 1/

Revenue and grants

22.0

22.0

20.9

21.8

22.6

23.1

Expenditure

24.2

24.9

24.1

30.7

29.3

26.4

Current, including interest

17.0

17.2

17.6

25.3

24.4

21.6

Capital

6.9

6.6

5.8

5.3

5.0

4.9

Overall balance, including ACP

-2.2

-2.9

-3.2

-8.9

-6.7

-3.3

Overall balance, excluding ACP

-2.2

-3.2

-3.6

-10.1

-7.4

-4.0

Total public debt

Debt of the Non-financial public sector 2/

35.3

37.3

42.2

64.0

62.9

62.5

External

28.7

30.6

35.3

55.1

54.2

54.4

Domestic

6.6

6.7

6.9

8.9

8.7

8.1

Debt of ACP

4.4

4.2

3.8

4.3

3.5

2.9

Other 3/

3.4

4.2

4.1

5.2

4.6

4.4

External sector

Current account

-5.9

-7.6

-5.0

2.3

-3.4

-3.3

Net exports from Colon Free Zone

3.0

2.5

2.7

3.2

2.7

2.8

Net oil imports

3.8

4.4

3.8

1.6

2.2

2.1

Net foreign direct investment inflows

6.9

7.6

5.5

1.2

4.0

6.4

External Debt

149.6

153.0

156.8

201.9

186.3

185.3

Memorandum items:

GDP (in millions of US$)

62,203

64,928

66,788

52,938

59,447

63,084

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 2017-18.

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] 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: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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