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Public Information Notice (PIN) No. 04/28
March 26, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Panama

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 22, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama.1


Following two years of weak growth, economic activity recovered in 2003 as real GDP grew about 4 percent. The recovery has been led by a boom in construction, the primary sector (particularly fishing), and a rebound of export-oriented services in the latter part of the year. Unemployment declined modestly in 2003, although it remains high at about 13 percent. Inflation remained low.

Fiscal policy is guided by a fiscal responsibility law, enacted in May 2002, which limits the nonfinancial public sector deficit to at most 2 percent of GDP and targets a gradual reduction in public debt to 50 percent of GDP. The deficit limit was observed in 2002, and official data indicate continued compliance with the fiscal law in 2003, with a deficit of 1.9 percent of GDP. The fiscal deficit that is comparable with data for periods prior to the fiscal rules is 3.6 percent of GDP, despite spending cuts in the last quarter of 2003, as higher revenues from a tax reform in late 2002 were offset by lower nontax receipts and substantially lower capital revenues than in 2002.

The debt management strategy seeks to improve the maturity structure of debt and deepen the domestic capital market. Three- and five-year treasury notes began to be issued in 2002, helping to define a Panamanian yield curve. Global bond issues, totaling US$3.7 billion since 1999, have been used to meet fiscal financing needs and retire Brady bonds. The authorities have begun to implement a policy of including collective action clauses in their bond issues.

The banking system experienced some stress during 2002 as a result of the turbulence in financial markets in South America, but it began to recover in 2003. Large withdrawals of deposits by nonresidents in 2002 led to a scaling back of foreign credit operations, while domestic deposits and private sector credit contracted modestly and deposit spreads (over LIBOR) rose, particularly for local banks. Private sector credit and bank deposits resumed growth in the second half of 2003, and falling deposit spreads gave further evidence of the banking sector's recovery.

The fundamentals of the banking system remain sound, and the supervisory framework for the financial system has been strengthened. Capital adequacy ratios exceed 17 percent on average; liquidity is ample; banks sharply improved their profitability; and nonperforming loan ratios decreased somewhat, to less than 3 percent on average as of end-September 2003. The authorities have taken various actions toward reaching full compliance with the Basel Core Principles, including steps to improve offsite and onsite inspections, in line with the recommendations of an IMF Offshore Financial Center Module 2 assessment in 2001.

The recovery of economic activity is continuing in 2004. The buoyancy of construction is helped by tax incentives that expire at end-2004, and the export-oriented transport, communication and tourism sectors should benefit from an improved external environment.

Recent free trade agreements—including an agreement with Taiwan Province of China—are aimed at encouraging foreign investors with a regional focus to establish operations in Panama, making use of the transportation, financial, and communications infrastructure. These service sectors are areas of comparative advantage that are a focus of the government's medium-term growth strategy.

Executive Board Assessment

Executive Directors welcomed Panama's recent economic recovery and the strengthening of the banking system in a setting of low inflation. Directors considered that further fiscal consolidation underpinned by structural reform will be essential for keeping public debt dynamics under control, and for helping to manage the risks associated with a fully dollarized economy. The main challenges in 2004 will be to maintain a sound fiscal policy through compliance with fiscal rules, address the urgent need for social security reform, and step up the pace of growth-enhancing structural reforms.

Directors commended the authorities for their commitment to fiscal discipline through adherence to the fiscal responsibility law and their efforts to enhance revenues through the December 2002 tax reform. At the same time, Directors, noting the somewhat weaker-than-anticipated fiscal outturn in 2003, stressed the need to take the fiscal measures that may be needed to adhere to the deficit limit for 2004. In this regard, Directors encouraged the authorities to adopt a quarterly program to help guide fiscal policy during the political transition in 2004. Additional reforms are needed to ensure sustained compliance with the fiscal rules, including civil service reform, and steps to improve tax administration and to further broaden the tax base and reduce exemptions. Noting that a strengthened economic infrastructure is essential for enhancing Panama's growth prospects, Directors cautioned against undue reliance on capital expenditure cuts to meet the fiscal rule. Some Directors also suggested that the authorities aim for a more ambitious deficit reduction in times of strong economic performance, to safeguard fiscal sustainability over the medium term.

Directors urged the authorities to reverse the deterioration in the finances of the social security agency and take early action to restore its solvency. In this vein, they welcomed the steps taken to increase the return on the pension fund reserves and to rationalize operating expenditures. Nevertheless, a comprehensive reform of the pension system is needed, as under current policies the pension fund will be exhausted within 10-15 years. Directors therefore welcomed the momentum toward reform created by the National Dialogue on social security, which has raised public awareness of the urgency of pension reform, and they encouraged the authorities to build on it.

Directors agreed that Panama's total public sector debt is likely to be sustainable, but with little room for countercyclical fiscal policy. They advocated making faster progress toward lowering the debt-to-GDP ratio and gross financing needs. Directors concurred with the authorities' debt management strategy to improve the maturity structure of debt and deepen the domestic capital market. They welcomed the authorities' decision to include collective action clauses in all their future sovereign bond issuances.

Directors welcomed the progress made by the Superintendency of Banks in strengthening bank regulation and supervision, in particular in the areas of inspections and consolidated supervision of regional banking institutions. The banking system has remained sound for many years, despite the absence of a lender of last resort and a deposit insurance scheme, thanks to a prudent fiscal policy and a strong regulatory and supervisory framework that emphasizes crisis prevention, transparency, and market discipline.

Directors noted that Panama has a comprehensive legal framework to combat money laundering, and has ratified the UN International Convention for the Suppression of the Financing of Terrorism.

Directors supported the authorities' growth strategy, which aims at exploiting the country's comparative advantage in the export-oriented service sector. The success of the strategy will require an improvement in the environment for productive investment and job creation. In particular, it will be important to reduce labor market rigidities, and Directors encouraged the authorities to seek consensus for reforms in this area. Directors welcomed other elements of the strategy, in particular the promotion of good governance, and the identification and removal of barriers to foreign investment, including through a more transparent foreign investment legal framework.

Directors commended the authorities for maintaining a relatively open trade regime, and for their commitment to free trade principles.

Directors noted that Panama's economic and financial statistics are generally adequate for surveillance purposes. They encouraged the authorities to improve the timeliness and quality of fiscal data, and in this regard, they welcomed the authorities' interest in adopting the standard of the 2001 GFS Manual.

Panama: Selected Economic Indicators



Proj. 1/







(Annual percentage change, unless otherwise indicated)

Real economy


Nominal GDP






Real GDP (1996 prices)






Consumer price index 2/













Money and credit


Broad money 3/






Credit to private sector






Deposit rate 6-month






(In percent of GDP, unless otherwise indicated)

Savings and investment


Gross domestic investment






National savings






External savings







External sector


Current account






Capital and financial account






Real effective exchange rate (depreciation -)






External public debt







Nonfinancial public sector


Revenue and grants












Overall balance






Overall balance for monitoring of Law 20 4/






Sources: Panamanian authorities; and IMF estimates.

1/ Fund staff projections.

2/ End of period.

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

4/ Law 20 is the Fiscal Responsibility Law of May 2002.

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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