Public Information Notices

Panama and the IMF

Public Information Notice (PIN) No. 00/13
February 28, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Article IV Consultation with Panama

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 February 16, 2000, the Executive Board concluded the Article IV consultation with Panama.1


The moderate economic growth and low inflation that has characterized Panama's economy in recent years continued in 1999, when real GDP grew by 3.2 percent, compared with an average rate of 3.8 percent in 1996-98. A decline in the activity of the Colon Free Zone (ZLC) stemming from a fall in import demand from neighboring countries was the main drag on growth in 1999. Strong increases in activity took place in construction, which was stimulated by investment in the reverted areas (those areas of the Canal Zone that have recently been transferred from the United States to Panama), electricity, and telecommunications. The rate of unemployment declined from 14.3 in 1996 to 11.6 percent in 1999.

With the U.S. dollar as its currency, inflation remained low, with average consumer prices increasing by 1.5 percent in both years, and Panama's interest rates moved closely with U.S. rates. The gap between the base commercial lending rate in Panama and the prime rate in the United States narrowed slightly from 2.1 percent in the beginning of the year to 1.8 percent at the end. In 1999, bank credit to both consumers and businesses increased strongly, so that total private sector credit is estimated to have grown by 16 percent in the twelve months ended December, 1999. The ratio of nonperforming loans to total bank assets increased from an average of 4 percent during 1996 to 7.3 percent by June 1999.

The external current account deficit rose from 6.9 percent of GDP in 1997 to an average of 13.5 percent of GDP in 1998-99, mainly reflecting the increase in investment and a drop in net exports from the ZLC. The current account deficit was mostly financed by foreign direct investment, which is estimated to have averaged 12.4 percent of GDP in 1998-99. The external public debt declined from 74 percent of GDP in 1995 to about 58 percent of GDP in 1998-99, due to a restructuring of the external public debt stock.

The public sector deficit declined to an estimated 1.2 percent of GDP by end-1999, after ballooning to 3 percent in 1998 because of expenditures related to the electoral campaign, which ended in May 1999. A stock adjustment to net public debt reflecting the issue of recognition bonds for the privatized civil service complementary pension plan explains most of the increase in net public debt from 47.8 percent of GDP at end-1998 to 53.0 percent at end-1999.

The pace of structural reform slowed during the electoral period. In the previous two years substantial progress was achieved with trade liberalization (import quotas were replaced by tariffs, nearly all of which were reduced to 15 percent); privatization (several large public enterprises including most utilities were divested); and financial sector reform (modern banking legislation was introduced and a supervisory agency created).

The government of President Mireya Moscoso, which assumed office in September 1999, was elected on a platform of poverty reduction. The new administration raised tariffs in October 1999 and January 2000 on some foodstuffs to the maximum levels allowed by the WTO agreement. The administration has recently announced that it will seek legislative authorization to use the assets of the Trust Fund (the repository of the proceeds from privatizations) amounting to about 14 percent of GDP to repurchase outstanding external bonds. This operation is expected to generate substantial interest savings and improve Panama's international credit rating and borrowing costs. The administration's budget for 2000, which has been approved by the legislative assembly, projects a deficit for the public sector of 2.2 percent of GDP. An additional allocation for investments in the social sectors of $200 million (2 percent of GDP) has been proposed.

Executive Board Assessment

Executive Directors commended the authorities for Panama's recent economic performance, which was characterized by moderate economic growth, low inflation, and declining unemployment. At the same time, Directors observed that, given the level of public sector indebtedness, the loss of momentum in the implementation of structural reforms and the public expenditure overruns that occurred in 1998-99 could reverse some of the progress achieved. They urged the Panamanian authorities to persevere with fiscal consolidation, and to accelerate their plans for structural reform. Further progress in these areas would help reduce domestic demand pressures, improve productivity and international competitiveness, and sustain Panama's attractiveness to domestic and foreign investors.

Directors noted the recent progress made in reducing the overall deficit of the public sector. However, they cautioned that the modified budget proposal for 2000, without any compensatory fiscal measures, could substantially increase the overall fiscal deficit. Directors encouraged the authorities to adhere to a path of fiscal consolidation.

The recent problems with expenditure overruns had underscored the importance of improving expenditure control procedures. Directors welcomed the progress achieved with the automated financial management system, and encouraged the authorities to bring this work to a successful conclusion. They noted that reducing unproductive expenditures could create room for additional social expenditures, in line with the priorities of the new authorities. It was also noted that there was a need to implement measures to redress the social security system's financial imbalances, and to prevent further increases in the gap between expenditure and payroll tax contributions.

Directors welcomed the proposal to use the assets of the Trust Fund to reduce Panama's outstanding external debt, noting that such a move would entail interest savings that would contribute to the much-needed fiscal adjustment.

They encouraged the authorities to complete the privatization or rationalization of the remaining nonfinancial public enterprises. The water company and Tocumen Airport should be privatized, or at least have their operations put on a more efficient commercial footing. Directors also encouraged the authorities to reflect the quasi-fiscal operations of the Agricultural Development Bank and the National Mortgage Bank in the budget, and to transfer their lending operations to commercial banks.

Directors expressed concern over the recent rapid pace of credit expansion and the apparent deterioration in the quality of commercial bank asset portfolios. They welcomed the newly created Superintendency of Banks, and encouraged the authorities both to issue pending regulations on asset quality and liquidity, and to ensure the timely availability of bank soundness indicators. A few Directors also encouraged the authorities to further strengthen legislation aimed at improving the overall transparency of operations in the banking system. Directors stressed that effective supervision of the banking system was particularly important to avoid large swings in output and employment, in light of Panama's large and persistent external current account deficit and its status as a dollar economy. A few directors were of the view that the large current account deficit reflected rising productive private investment, and did not present a serious balance of payments risk.

Directors urged the Panamanian authorities to reverse the recent increases in tariffs on foodstuffs and other items as soon as possible. They noted that those increases would raise the cost of domestically produced import-competing goods, with adverse effects on resource allocation, employment, and the welfare of the poor.

Directors took note of the authorities' intention to conduct a broad-based consultation with the public on a reform program. They stressed that the emphasis put by the new authorities on poverty reduction, and their commitment to fiscal consolidation, should facilitate discussion on a program that could be supported by international agencies and donors.

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

  1995 1996 1997 1998 1999 1/

Real economy          
Nominal GDP 2.2 3.1 6.2 5.6 5.0
Real GDP 1.8 2.8 4.5 4.1 3.2
Consumer Price index 2/ 0.8 2.3 -0.5 1.4 1.5
Unemployment rate 3/ 14.0 14.3 13.4 13.6 11.6
Gross national saving 4/ 25.6 26.8 24.1 21.0 21.8
Nonfinancial public sector 4/          
Revenue and grants 29.2 27.9 28.7 28.3 29.1
Expenditure 29.0 27.5 28.9 31.3 30.3
Current 25.6 23.7 24.6 24.9 25.4
Capital 3.4 3.8 4.3 6.4 4.9
Saving 3.3 4.0 3.0 2.4 2.9
Overall balance 0.2 0.4 -0.2 -3.0 -1.2
Money and interest rates 5/          
Net domestic assets of the banking system 6.9 7.3 9.4 17.0 15.1
Public sector (net) -3.9 2.5 -2.0 -1.3 -0.2
Private sector 11.9 7.0 12.6 21.9 16.2
Liabilities to the private sector 8.2 8.1 15.3 12.2 11.2
Deposit rate (six month) 6/ 6.5 6.4 6.2 6.1 7.0
External economy          
Current account balance 4/ -4.7 -3.7 -6.9 -13.3 -13.8
Gross external debt 2/ 4/ 74.5 62.0 57.8 58.1 58.4
Net public debt ... 53.0 47.3 47.8 53.0
Public external debt-service ratio
(in percent of exports of goods and services 2/ 7/)
22.4 15.2 44.3 19.8 25.4
Real effective exchange rate (depreciation -) -4.1 0.5 1.0 0.5 1.5

Sources: Panamanian authorities; and IMF staff estimates.

1/ Fund staff projections.      
2/ End of period.      
3/ Based on August observations.      
4/ In percent of GDP.      
5/ In percent of initial stock of liabilities of the private sector.      
6/ Period average. The estimate for 1999 is based on the observed values in the first three quarters of the year.
7/ Figures for 1997 reflect the effect of debt restructuring.

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 Executive 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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