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Panama: Concluding Statement of the 2015 Article IV Mission
March 13, 2015
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
An International Monetary Fund (IMF) mission, headed by Luca Antonio Ricci, visited Panama City during March 3-13 to conduct the country’s annual Article IV consultation, part of the IMF’s regular surveillance of all member countries. At the end of the discussions, Mr. Ricci issued the following statement:
The IMF staff’s baseline projections are favorable, with balanced risks. The policy discussion was centered on the importance of strengthening the financial and fiscal policy framework, building policy buffers, as well as continuing reforms geared towards securing sustainable and inclusive growth.
Panama’s economic performance is expected to remain strong
1. IMF staff’s baseline projections are favorable, with the highest growth in Latinamerica, low inflation, improving public finances, and a declining current account deficit.
2. The new administration is pressing ahead with the policy agenda. The authorities released a five-year strategic plan designed in consultation with the private sector and within the fiscal constraints of the existing SFRL. The plan should catalyze investment and support growth in key sectors, while promoting socio-economic developments, in part by enhancing the education system, social programs, and labor markets.
Near-term risks mostly relate to a weaker global economy or to possible delays in enhancing financial transparency
3. Strong integration within the global trade and financial system brings substantial benefits to Panama, but also makes it vulnerable to external shocks. Slower-than-expected global growth and weaker trade represent downside risks. An abrupt surge in global financial market volatility or an upward shift in U.S. interest rates would feed quickly into the local financial system, with spillover effects on the local economy. However, strong fundamentals and the room to implement a countercyclical fiscal response would mitigate the impact of such external shocks.
4. The potential negative impact from inadequately tackling financial transparency shortcomings could be significant. In February, the Financial Action Task Force (FATF) recognized steps being taken to address deficiencies in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, and indicated that the authorities should continue pressing ahead with their work agenda. While there may be short-term adjustments associated with complying with international transparency requirements, the longer term benefits of having a financial sector grounded in transparency are expected to be positive. Delaying reforms to financial transparency could restrict access to global capital and the international payments system with negative implications for the economy.
The most immediate priority is to strengthen financial integrity
5. Given the risks to Panama’s economy, it is imperative to swiftly bring the financial integrity framework in line with the international standard. After the FATF identified Panama as having strategic AML/CFT deficiencies in 2014, maintaining some correspondent banking relationships and conducting some international transactions has become more challenging, although with modest overall impact so far. The authorities are clearly committed to implementing the recommendations of the IMF AML/CFT assessment and the action plan agreed with the FATF. The cabinet is in the process of approving the draft Law. It is crucial to gather full political support to pass as soon as possible legislation through the National Assembly in order to meet the international standard.
The medium term fiscal framework needs to be revisited
6. Strengthening the medium-term fiscal framework is a priority. The repeated revisions to the SFRL deficit ceilings and the potential for overspending allowed by the special provision leave Panama without a robust fiscal anchor. The authorities should refrain from changing the SFRL ceilings and should review the special provision. To further strengthen the fiscal framework, the authorities should consider lowering the level and broadening the definition of the net debt target that is embedded in the SFRL. Indeed, exposures to shocks and contingent liabilities, large unfunded future pension liabilities, and the temporary financing needs of a liquidity facility to backstop the banks argue for larger fiscal buffers. The net debt definition could be broadened to include for example other outstanding public liabilities and liquid public financial assets. Finally, to ensure the revised SFRL is binding, a more explicit accountability framework will also need to be put in place.
7. Policy efforts should be devoted to raising tax revenues and streamlining current expenditures. An increase in revenues could be achieved by strengthening tax collection and reviewing tax policy, so as to rely less on tax amnesties. The newly established Direccion General de Ingresos (DGI) should continue its efforts to expand capacity and enhance efficiency. Addressing the unfunded pension liabilities will require not only public funding but also reforming the pension system. The planned revision of the electricity subsidies is a positive step, and more broadly the targeting of subsidies should be improved.
8. The authorities should take advantage of the declining international food and fuel prices in order to phase out price controls by mid-year. Concerns over the non-competitive behavior of food retailers—a principal motivation for the price controls—should be tackled, if needed, through the existing anti-trust framework.
Financial sector reforms are on a positive trajectory
9. The authorities are enhancing financial sector regulation and taking measures to strengthen macroprudential surveillance. Following the adoption of stricter loan classification rules and of countercyclical provisioning, the Superintendency of Banks (SBP) has taken steps to align capital regulation with the Basel III framework and to require minimum capital for financial holdings. A conglomerates law improves governance, reduces risk by limiting cross-ownership, and enhances supervisory capabilities of the SBP. The SBP has started to monitor house price developments and intends to expand its oversight to household indebtedness so as to better assess borrowers' payment capacity and potential credit risks. The SBP also has plans to upgrade the regulations on liquidity and market risk and to publish an enhanced financial stability report on a semiannual frequency.
10. The authorities need to remain vigilant, and undertake further steps to fully implement the 2011 Financial Sector Assessment Program (FSAP) recommendations. The size and openness of the financial sector make it vulnerable. It is therefore essential to enhance the ability to monitor and assess idiosyncratic, systemic, and external risks in the financial sector, including by collecting more information on commercial real estate prices and on corporate leverage. Moreover, a key priority ahead will be to create a facility for the provision of temporary liquidity to banks. There is also a need to build a macroprudential policy framework and continue developing the corresponding tools, for example to mitigate adverse developments in the real estate sector. A deposit insurance scheme for small deposits would protect the majority of depositors, mitigate the risk of runs, and complement social protection policies. Modernizing legislation on Insurance companies, Cooperatives, Trust Funds, and Public Accountants will improve the regulation, supervision, and accountability of these entities.
Ensuring a sustainable and inclusive growth path
11. Sustaining future growth will require steady improvements in training, education, and health care. Economic growth has facilitated important progress in poverty reduction over the past decade. Going forward, capital accumulation in the public sector is expected to decelerate, and growth will need to depend much more on raising productivity. It will be essential to continue efforts on improving the quality of public education and health, addressing skill mismatches, promoting greater female labor force participation, and strengthening institutions. Doing so will enhance human capital, reduce skills shortages and youth unemployment, improve the business environment, as well as raise productivity and living standards.
The mission would like to thank the Panamanian authorities for their kind hospitality, excellent cooperation, and candid discussions.
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