Public Information Notice: IMF Concludes Article IV Consultation with Panama

January 5, 1999

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.

On December 16, 1998, the Executive Board concluded the Article IV consultation with Panama1.


Following Panama’s recovery from the adverse effects of the crisis of the late 1980s, the government which took office in 1994 initiated an economic program based on a prudent fiscal stance, the restructuring of the public external debt, and implementation of structural reforms. Recent structural measures have included substantial trade liberalization, the privatization of important utilities, and the introduction of modern banking legislation. The program has been supported by external donors and multilateral institutions, including the World Bank, the Inter-American Development Bank, and the IMF (through an extended arrangement that was approved by the IMF Executive Board on December 10, 1997). The program has helped improve the climate for private sector activity and contributed to sustained economic growth, a reduction in the unemployment rate in the context of low inflation, and a substantial decrease in the public debt burden.

Real GDP growth increased to 4.4 percent in 1997 from 1.8 percent in 1995, but slowed somewhat in the first half of 1998 mainly due to the impact of the international financial turbulence on neighboring economies and the El Niño effects on agriculture, electricity, and water supply. The unemployment rate, which had stayed around 14 percent, declined to 13.4 percent in August 1997 and was at that same rate in August 1998. Inflation has remained low mainly because of the discipline associated with Panama’s monetary and exchange rate arrangements. A prudent fiscal stance has been maintained in recent years, which together with external debt restructuring, facilitated a reduction of the external public debt to 57½ percent of GDP at end-June 1998 from 75 percent of GDP at end-1995. The overall balance of the public sector moved to small deficits in 1997–98 from a surplus of 0.4 percent of GDP in 1996, reflecting the initial fiscal cost of structural reforms and spending on emergencies, including drought. The external current account widened to 4½ percent of GDP from 1½ percent of GDP over the same period.

Under the government economic program for 1999, structural reforms would continue in the context of a prudent fiscal stance. The program envisages real GDP growth of about 4 percent with inflation remaining low. While the public balance would show a small deficit (1 percent of GDP), the public external debt burden would continue to decline. Key structural action would include a continuation of privatization, and the launching of a new private civil service pension fund.

Executive Board Assessment

The authorities are encouraged by the positive results of their strategy and are determined to remove remaining impediments to economic efficiency and private sector investment to foster economic growth. While maintaining a sound fiscal policy, the authorities’ program for 1999 continues to focus heavily on privatization, and includes financial sector reform and the completion of the administrative arrangements for the establishment of a voluntary and self-financed private pension plan for the civil service.

Executive Directors viewed this program as an important step in the authorities’ medium-term strategy to put Panama on a sustainable growth path. They recognized the circumstances that have led to a slightly less ambitious fiscal target for 1999 and the risks of a slowdown in the pace of fiscal and structural efforts following the political transition in September 1999. On balance, however, they considered that the proposed policies for 1999 merited support by the IMF and would create the basis for the continued implementation of the program. Thus, Directors welcomed the authorities resolve to maintain a prudent fiscal stance and to dedicate unanticipated tax revenue in 1999 largely to deficit reduction. In this context, a policy of wage moderation will strengthen the public finances and provide appropriate signals for private sector wage settlements. Also, the authorities will intensify efforts to control costs of the Social Security Agency and improve collection of dues, while taking steps to implement policies to ensure its long-term financial viability.

It is important that the authorities adhere to the timetable specified for structural action, including further privatization and the preparation of tax and civil service reforms scheduled to be introduced in late 1999 by a new administration. In order to help increase efficiency and facilitate private initiative, the authorities have been pursuing policies to reduce the role of the public sector. Deserving special mention are the privatization of seven electricity units ahead of schedule, progress on preparations for the privatization of the water company and in attractingsizable private sector investment to areas reverting to Panamanian control. Certain other enterprises would be privatized during the second annual program.

Directors welcomed the authorities’ efforts to improve bank supervision and strengthen the regulatory framework for the financial system. It would be important to institute as soon as possible key regulations under the new Banking Law, especially those on limits on credit concentration and credit to related parties. The effectiveness of the new Banking Law should be reviewed in light of experience before the end of 1999. Also, it would be important to ensure that the new legal framework for the stock market is put in place soon.

Directors supported the authorities’ objective of improving efficiency in the public sector, particularly by divesting the National Mortgage Bank and through the introduction of legislation to replace the Agriculture Development Bank with a new and more efficient program to extend credit to small farmers. Also, the operations of the state-owned Savings Bank should be monitored closely to ensure that it is operating efficiently. At the same time, it would be important that the new privately managed civil service pension fund start operations soon.

Directors welcomed the authorities’ efforts to promote competition in the economy, protect the environment, and redress poverty.

Panama is working to establish a more centralized and complete financial data collection system that should help improve the provision of core statistics to the IMF. Continued effective surveillance requires that efforts be intensified to improve data quality and timeliness, particularly as regards financing information.

Panama: Selected Economic Indicators
(Annual percent change unless otherwise noted)

1994 1995 1996 1997 19981

Real economy
Nominal GDP 6.6 2.2 4.3 6.5 5.0
Real GDP 2.9 1.8 2.4 4.4 4.0
Consumer price index2 1.3 0.8 2.3 -0.5 0.5
Unemployment rate3 14.0 14.0 14.3 13.4 13.4
Gross national saving4 24.1 22.8 22.0 22.4 23.6
Nonfinancial public sector4
Revenue and grants 28.5 29.2 27.6 28.3 27.7
Expenditure 28.2 29.0 27.2 28.6 28.5
Current 24.7 25.6 23.4 24.2 24.3
Capital 3.4 3.4 3.8 4.4 4.2
Saving 3.8 3.5 4.2 3.3 2.4
Overall balance 0.3 0.2 0.4 -0.3 -0.7
Money and interest rates5
Net domestic assets of the banking system 8.4 8.4 5.0 10.3 13.0
Public sector (net) -5.1 -3.6 2.6 -2.1 -3.6
Private sector 14.2 11.9 6.9 12.6 17.0
Liabilities to the private sector 17.9 8.2 8.1 15.3 10.5
Deposit rate (six month)6 5.5 6.5 6.4 6.2 6.2
External economy
Current account balance4 -0.4 -3.4 -1.6 -3.0 -4.4
Public external debt2 4 71.2 75.2 61.8 57.9 59.0
Public external debt-service ratio (in percent
of exports of goods and services)2 7 20.3 21.9 15.4 44.4 18.5
Real effective exchange rate
(depreciation -)8 -4.0 -1.8 0.4 0.8 0.4

Sources: Panamanian authorities; and IMF staff estimates.

1Fund staff projections.
2End of period.
3Based on August observations.
4In percent of GDP.
5In percent of initial stock of liabilities to the private sector.
6The 1998 figure reflects August 1998.
7Figures for 1997-98 reflect the effect of debt restructuring.
8The 1998 figure reflects the 12-month change at end-September 1998.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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