Press Release: IMF Approves Stand-by Credit for Panama

November 29, 1995

The International Monetary Fund (IMF) today approved a stand-by credit authorizing drawings up to the equivalent of SDR 69.8 million (about $104 million), over the next 16 months in support of the Government's economic and financial program. Of this amount, 25 percent of each drawing will be set aside to finance debt and debt-service reduction (DDSR) operations. In addition, the IMF will be prepared to consider an augmentation in the amount of the stand-by credit in the event that financing arrangements are concluded with commercial bank creditors and upon determination by the IMF that such arrangements are consistent with the objectives of the program.


Following a period of political turmoil and a sharp economic contraction in 1988-89, Panama implemented an economic recovery program that sought to restore financial stability and liberalize the economy. Over the past five years, public finances have shifted to a surplus of 0.4 percent of GDP in 1994 from an overall deficit (accrual basis) of 11.3 percent in 1989. Economic sanctions were lifted and large aid flows enabled Panama to normalize relations with a number of external creditors and initiate negotiations on debt restructuring with others. Large capital inflows helped sustain rapidly expanding levels of private investment and consumption, and the economy experienced a strong recovery in the first half of the 1990s. However, progress in deregulation, privatization, and public sector reform was limited, and severe underlying distortions continued to erode the basis for sustained growth. In response to this, the Administration that took office in September 1994 began to implement a program that emphasizes reduction of the size of the public sector, deregulation of the economy, and debt relief as means to accelerate growth and to reduce unemployment and poverty.

The 1995-96 Program

The Government's medium-term program seeks to achieve, in the context of medium-term viability, a recovery in the rate of real GDP growth to 4 percent in 1996 and higher rates thereafter, while maintaining inflation below 2 percent. To these ends, the authorities will be reinforcing expenditure controls and efforts in revenue collection so as to accommodate rising investment: public sector operations, which went into a deficit of 0.6 percent of GDP in 1995 will return to a surplus of 0.4 percent of GDP in 1996. At the same time, the authorities are proceeding with reforms that would strengthen the public finances in the medium term. In this context, in June 1995 the Legislative Assembly approved the Tax Incentives Harmonization Law which, among other things, phases out and reduces subsidies and tax breaks. This will improve resource allocation and broaden the tax base. Also, the authorities have been formulating a new public wage and employment policy for implementation in 1997. In the rest of the public sector, the Government is preparing various proposals to improve the finances of the social security system.

Structural Reforms

Under the program, with World Bank and Inter-American Development Bank assistance, the authorities are continuing to strengthen the management of public enterprises and the regulatory framework is being reformed to allow full or partial privatization of enterprises, or the contracting out of services to the private sector. By mid-1996, 49 percent of the shares of the telecommunications company (Intel) will have been brought to the point of sale, and a substantial part of the operations of the ports of Cristobal and Balboa will have been contracted out to the private sector.

To reduce the cost of production, the authorities also are undertaking reform outside the realm of the public sector. The National Assembly recently approved the reform of the Labor Code, which will significantly reduce labor market rigidities. Through the Law for the Defense of Competition (currently being drafted), penalties would be introduced for practices that restrict free competition, price controls would be eliminated, and anti-dumping clauses compatible with World Trade Organization (WTO) standards would be introduced. In addition, negotiations for Panama's accession to the WTO are close to completion and preparations for the reversion of the Canal Zone have been intensified.

Addressing Social Costs

The Government's reform agenda seeks to reverse the trend of the past several decades, when income distribution and the real incomes of the poor deteriorated sharply as a result of pervasive policy distortions. Efforts are under way to improve the efficiency and equity of social spending in the education and health sectors, and to target subsidies to the most vulnerable groups. The activities of the Social Emergency Fund are being expanded so that more community-generated projects can offer employment and basic services to the underprivileged.

DDSR Operation

In May 1995, Panama reached agreement-in-principle with its creditor banks on a DDSR operation for $3.5 billion. This agreement, which contains a menu of financing options, is to be concluded in the spring of 1996. Based on a preliminary selection of financing options by creditors the up-front cost of this package would be about $190 million, about half of which would be financed by international financial institutions (including the IMF), and Panama would cover the remainder with its own resources.

The Challenge Ahead

Panama faces important challenges related to the need to combat unemployment and poverty. The Panamanian authorities' economic program represents a serious adjustment effort that, through raising growth rates over the medium term. Its full implementation would significantly contribute to meeting these challenges.

Panama joined the IMF on March 14, 1946; its quota1 is SDR 149.6 million (about $224 million), and its outstanding use of IMF credit currently totals SDR 67 million (about $100 million).

Panama: Selected Economic Indicators

  1992 1993 1994 1995* 1996*

(percent change)
Real GDP 8.6 5.6 4.7 3.0 3.8
Consumer prices
    (end of period)
1.6 1.0 1.3 1.5 2.0
(percent of GDP)
Public sector balance
    (accrual basis, deficit –)
1.8 –1.5 0.4 –0.6 0.4
External current account balance
    (deficit –)
–4.2 –4.1 –6.4 –5.8 –5.0

Sources: Panamanian authorities; and IMF staff estimates.

1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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