Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Panama

March 14, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the Article IV consultation with Panama may be made available at a later stage if the authorities consent.

Public Information Notice (PIN) No. 06/29
March 14, 2006

On February 15, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama.1


Despite the adverse impact of the surge in world oil prices, real GDP is estimated to have expanded by 5.5 percent in 2005 following growth of 7.6 percent in 2004, while unemployment fell substantially to 9.6 percent of the labor force, and the external position improved. Inflation has remained low, but rose to 3.4 percent due to the pass-through of increases in oil prices.

As a result of the strong economy and new legislation to enhance revenues and curtail outlays, the deficit is estimated to have fallen somewhat below the target of 3.6 percent of GDP in 2005. The declining trend in tax revenue was reversed, non-tax revenue recovered, and current expenditure fell significantly owing to a cautious wage policy and enhanced spending discipline. An improvement in the quality of government spending and a more rapid repayment of arrears to suppliers were also achieved. The Assembly approved a reform to address the imbalance of the pension system by adjusting contributions and eligibility of the defined benefits component and adding a system of individual accounts.

Strong supervision and regulation have helped preserve the soundness of the banking system, which continues to be well capitalized, highly profitable and largely compliant with the Basel Core Principles. As a result of strong credit growth, bank liquidity has declined, but remains at comfortable levels. The government has accessed international markets at favorable terms, and has launched a program to improve the maturity structure of external liabilities.

Efforts to improve market relations with key trading partners are underway. Free trade agreements (FTA) with Singapore and Chile have been negotiated and negotiations on a FTA with the United States are ongoing.

In 2006, economic growth is expected to moderate to 4.5 percent, inflation to remain low, at 1.9 percent, and the external position to improve further. While exports of services would benefit from an encouraging external environment and construction is expected to pick up, high oil and electricity prices would dampen consumption and investment. The administration is committed to reducing the nonfinancial public sector deficit to 2.9 percent of GDP.

Executive Board Assessment

Executive Directors commended the authorities for Panama's solid economic performance in 2005, including strong economic growth and a reduction in unemployment, which should contribute to poverty reduction. Significant progress was made in strengthening public finances and a major reform of the social security system was introduced. The strengthened fiscal position has allowed Panama to access international markets at more favorable conditions and facilitated debt management operations. At the same time, Directors observed that a more ambitious medium-term fiscal policy framework than currently envisaged would help consolidate further the recent strong macroeconomic performance. They also called for continued efforts to reduce poverty and ensure that the benefits of economic growth are more evenly shared across all segments of the population.

Directors welcomed the ongoing fiscal consolidation effort, but noted that it is crucial to build on the recent achievements to attain a rapid decline in the debt to GDP ratio, which, at 63 percent of GDP, remains high and makes the economy vulnerable. They welcomed the authorities' intention to adopt policies aimed at a fiscal deficit target of 1 percent of GDP by the end of the administration, in 2009. To this end, Directors pointed out that further fiscal measures will need to be identified, including to offset the possible fiscal impact of a potential free trade agreement with the United States. In particular, Directors recommended measures to help raise the low tax revenue by broadening the tax base—in particular by reducing tax exemptions—and upgrading tax administration, while improving spending efficiency and reducing subsidies. This will also help create room for higher spending on poverty reduction programs. To help boost investors' confidence and contribute to sustained high growth and job creation, Directors noted that further measures will be needed over the medium term to help reduce public debt to a more manageable level, with several Directors indicating that a debt ratio of less than 40 percent of GDP by 2015 would be desirable.

Directors commended the recently approved social security reform, which is expected to address the actuarial deficit of the system, and was prepared with exemplary civil society engagement. Increased contributions, less generous eligibility requirements, higher but specified government transfers, and a new system of individual accounts will put the Social Security Agency (SSA) on a sound financial footing, address the contingent liability of the central government, and provide more certain retirement benefits to employees. Directors noted that the increased government transfers to the SSA—in accordance with the law—call for additional fiscal measures to help achieve the fiscal targets.

Directors stressed the importance of an early reintroduction of the planned fiscal responsibility law. The new law needs to move beyond numerical targets, focusing on transparency requirements, procedural rules, monitoring systems, sanctions, and enforcing mechanisms. Directors noted that the law could provide an opportunity to bring in frequent reporting of the operations of all non-financial public sector entities, with well defined procedures to minimize fiscal risks.

Directors shared the view that the envisaged major infrastructure projects should strengthen the economy's capacity to respond to increasing global trade. They noted that a decision to expand the Panama Canal would have major implications for the country's medium-term growth prospects, the structure of the economy and the types of skills the economy will require, and could help reduce poverty significantly. In addition, economic growth will also be fueled by other infrastructure projects, including modernization of ports and upgraded energy provision. Directors stressed that a comprehensive feasibility assessment of all these projects—including an assessment of Panama's debt implications—will be necessary to guide decisions.

Directors commended the authorities' commitment to preserve the soundness of Panama's banking system. They supported the envisaged policies to strengthen the management of market risk by banks and enhance consolidated supervision of holding companies and cross-border supervision of regional conglomerates. Directors welcomed the authorities' readiness to reinforce banks' surveillance and to encourage continued maintenance of adequate bank liquidity. They encouraged further efforts at strengthening and harmonizing the supervisory arrangements for non-bank deposit taking institutions and for the National Bank of Panama. Directors welcomed the substantial progress made in implementing regulations to counter money laundering and the financing of terrorism, while urging the authorities to continue their efforts to address remaining weaknesses.

While conventional indicators point to adequate competitiveness of Panama's economy, Directors called for further enhancements in structural areas, especially by upgrading the quality of human capital, improving the business environment, and continuing to promote good governance. Directors were of the opinion that greater labor market flexibility could be achieved by extending the flexible employment practices of the special economic zone to generate employment opportunities in other sectors of the economy.

Directors encouraged the authorities' to take the opportunity of the ongoing data ROSC to further improve the quality, timeliness, and coverage of economic data.

Panama: Selected Economic Indicators

        Proj. Proj. 1/


2002 2003 2004 2005 2006

(Annual percentage change, unless otherwise indicated)

Real economy


Nominal GDP

3.9 5.4 9.8 7.3 6.8

Real GDP (1996 prices)

2.2 4.2 7.6 5.5 4.5

Consumer price index 2/

1.8 -0.3 1.6 3.4 1.9


13.5 13.1 11.8 9.6 ...

Money and credit


Broad money 3/

0.9 4.6 8.6 5.8 7.2

Credit to private sector

-7.2 2.0 10.4 11.8 7.6

Deposit rate (1 year) 4/

4.5 3.6 2.5 3.1 ...
(In percent of GDP, unless otherwise indicated)

Savings and investment


Gross domestic investment

18.0 21.3 20.7 19.5 21.4

National savings

17.2 17.5 12.8 14.4 16.8

External savings

0.8 3.9 7.9 5.1 4.6

External sector


Current account

-0.8 -3.9 -7.9 -5.1 -4.6

Capital and financial account

3.0 1.0 3.2 9.0 4.3

Real effective exchange rate (depreciation -) 5/

-0.1 -7.3 -4.0 -0.6 ...

External public debt

51.7 50.3 50.8 50.1 48.9

Nonfinancial public sector


Revenue and grants

22.9 22.3 21.1 22.1 23.0


26.2 27.0 26.0 25.5 25.9

Balance, excluding Canal Authority

-3.3 -4.7 -4.9 -3.4 -2.9

Canal Authority 6/

0.5 1.0 1.0 1.1 1.0

Balance, including Canal Authority

-2.7 -3.7 -3.9 -2.3 -1.9

Sources: Panamanian authorities; and IMF staff estimates and projections.

1/ Fund staff projections.

2/ End of period.

3/ Corresponds to cash in circulation plus total private sector deposits in the banking system.

4/ Data through September 2005.

5/ For 2005, data through October.

6/ Balance of Canal Authority, after transfers of Canal fees and distribution of profits to the government.

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. 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.


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