IMF Executive Board Concludes 2008 Article IV Consultation with Panama

Public Information Notice (PIN) No. 08/113
August 28, 2008

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 July 28, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the 2008 Article IV consultation with Panama.1


The strong economic performance of the last few years continues, despite the deteriorating global environment. Panama was one of the fastest growing economies in the world in 2007 with real growth rising to 11.2 percent, following an average growth rate of nearly 8 percent in 2004-06. The large service sector, including the canal, ports, and the Colon Free Zone, strongly benefited from the regional and international trade expansion. Construction soared, and the well developed financial center quickly responded to new opportunities and has attracted significant new investment. At the same time, employment expanded significantly, leading to a decline in unemployment to an unprecedented low level. Growth in 2008-09 is projected to slow somewhat, to about 8 percent, with the Canal expansion and related investment activities partially offsetting the effects of higher oil prices and the slowdown in the U.S. and the global economy.

Like in the rest of the region, inflation has sharply accelerated, reaching almost 9 percent in May, after averaging about 1½ percent in the last twenty years. Although the surge in inflation is mainly due to higher global food and fuel prices and distortions in the agricultural sector, core inflation (excluding food and fuel) is rising as well reflecting the buoyant economic growth and the emergence of some capacity constraints. The current account deficit has also widened significantly as a result of the high level of foreign direct investment and the strong domestic demand.

The public finances have remarkably strengthened. The overall balance of the nonfinancial public sector (NFPS), excluding the Panama Canal Authority (PCA), turned from a deficit of about 5 percent of GDP in 2004 into a surplus of 3.5 percent of GDP in 2007, despite a major increase in capital spending in 2007. This improvement was due to structural factors reflecting fiscal reforms implemented by the government in earlier years, the containment of current spending, favorable cyclical conditions, a surge in transfers from the PCA, and one-off revenues.

The fiscal surplus is projected to fall below 1 percent of GDP in 2008 as a result of lower transfers from the PCA and an increase in expenditures, in part related to the government's program to partially alleviate the effects of higher food and fuel prices. The Canal expansion is shifting into higher gear and remains within budget. The strong fiscal performance combined with the fast pace of growth has led to a rapid decline in the public debt ratio. A new Fiscal Responsibility Law (FRL) that sets a deficit limit of 1 percent of GDP for the NFPS, excluding the PCA, and a debt target of 40 percent of GDP by 2015 was approved by the National Assembly in early May and should help sustain the improvements in public finances.

Expansion of the banking sector has been spurred by foreign investment, consolidation, and regional integration while the ongoing global financial turbulence does not appear to have impacted the sector or the rest of the economy. Increased scrutiny by the Superintendency of Banks has not uncovered bad assets. Banks' deposit base has continued to increase, and capital adequacy and financial ratios remain satisfactory. Although there has been a significant easing of monetary conditions as a result of the depreciation of the U.S. dollar and lower interest rates, liquidity has been building up moderately and growth of credit to the domestic private sector continues to expand in line with nominal GDP.

Executive Board Assessment

Executive Directors commended Panama's remarkable growth performance and improved public finances. Despite a deteriorating external environment, economic prospects are favorable, thanks to the Canal expansion project and associated investment, as well as improvements in competitiveness reflected in expanding export services such as tourism, communications, and transportation. While the current account deficit is expected to widen over the medium term, this should not undermine Panama's external stability, given the temporary nature of some of the factors.

Directors commended the authorities for the strengthening of the public finances, noting the remarkable turnaround in the nonfinancial public sector balance excluding the Panama Canal Authority, notwithstanding a significant increase in capital expenditures. The strong fiscal performance and rapid economic growth has led to a falling public debt ratio and an improvement in Panama's credit ratings.

At the same time, Directors pointed out that managing the sharp rise in inflation, which is due mainly to the higher global food and fuel prices, and the apparent overheating of the economy will be particularly challenging and will put a greater burden on fiscal policy to pursue a countercyclical stance. They encouraged the authorities to pursue such a stance, pointing to the continued positive output gap, inflationary pressures, and an additional expansionary stimulus from the weak dollar and low interest rates. This could be done by targeting a larger surplus, and a few Directors suggested achieving this through a moderation of capital spending. It would also be important to provide some additional room to expand programs to support the poor.

Directors welcomed the recent measures to ease the impact of inflation on less advantaged income groups, and called for additional measures targeted to help the most vulnerable members of society. Directors noted that the extension of the mortgage subsidy could further stimulate the already booming construction sector.

Directors welcomed the enactment of a new Fiscal Responsibility Law (FRL) and the preparation of a strengthened legal framework for public private partnerships (PPPs). They noted that the new FRL should help safeguard the improvements in public finances and maintain the debt-to-GDP ratio on its downward trajectory. They noted in this regard the staff's recommendation to set clear rules to govern transfers from the PCA to reduce the risks of circumventing the new FRL deficit limits.

Directors observed that Panama's financial market has not been adversely affected by the global financial turmoil, and commended the authorities for stepping up the monitoring of banks' asset quality, liquidity, and risk management. They noted that capital adequacy and financial ratios remain strong and that the dynamic financial sector is expanding rapidly, reflecting foreign investment, consolidation, and regional integration. Directors welcomed the enactment of the new Bank Law, which will strengthen the national supervisory framework and should help enforce regional supervisory provisions. Nevertheless, Directors stressed the need for vigilance, in light of the easing monetary conditions against the background of a rapidly growing economy, a booming housing market, and volatile global financial markets.

Directors commended the authorities' effort to reduce trade protection and increase incentives in the agricultural sector. They noted that although imports and distribution by the government of staple food items may have reduced price pressures, removing distortions and strengthening legal means to address unfair competition would provide a better and more lasting remedy. Reducing tariffs and increasing tariff rate quotas for selected food items is a welcome step to enhance competitiveness and moderate inflation. Directors also observed that steps to enhance productivity in the agricultural sector, including improved access to financing, insurance, and technical assistance, will help increase agricultural production over the medium term and will strengthen food security.

Panama: Selected Economic Indicators



2003 2004 2005 2006 2007 2008
  (Annual percentage change)

Real economy


Real GDP (1996 prices)

4.2 7.5 7.2 8.7 11.2 8.3

Consumer price index (end of year)

-0.3 1.6 3.4 2.2 6.4 8.8

Open unemployment 1/

10.9 9.2 7.6 6.7 4.7 4.7

Money and credit


Broad money

4.6 8.6 8.5 21.5 15.9 19.1

Private sector credit

2.0 10.4 13.3 12.9 18.2 22.9

Average deposit rate (1 year) 2/

3.5 2.5 3.2 5.1 4.6 3.2
  (In percent of GDP)

Saving and investment


Gross domestic investment

21.3 20.3 18.4 19.5 26.0 28.2

Gross national saving

16.9 12.7 13.4 16.2 18.1 17.9

External sector



39.2 42.9 49.1 49.5 47.2 46.1


-48.5 -53.7 -57.6 -59.5 -64.0 -67.2

Current account

-4.5 -7.5 -4.9 -3.2 -8.0 -12.1

Foreign direct investment

6.3 7.1 6.2 15.0 9.2 8.0

Real effective exchange rate (depreciation -) 3/

-9.4 -4.9 6.5 -4.7 -2.0 -4.8

Nonfinancial public sector


Revenue and grants

22.3 21.1 22.3 24.9 27.9 25.0


27.0 26.0 24.9 24.4 24.4 24.2

Balance, excluding Panama Canal Authority (PCA)

-4.7 -4.9 -2.6 0.5 3.5 0.7

Balance, PCA

1.0 1.0 1.0 0.7 0.4 0.1

Balance, including PCA

-3.7 -3.9 -1.6 1.2 3.9 0.8

Public debt 4/

60.1 62.2 58.3 52.6 45.7 37.8

Memorandum item:


GDP, in millions of balboas

12,933 14,179 15,465 17,134 19,740 23,424

Sources: Office of the Comptroller General; Superintendency of Banks; and IMF staff estimates and projections.
1/2008 data are as of March.

2/2008 data are as of May.

3/2008 data are as of April.

4/Excludes Global Bonds held by the Fiduciary Fund (4.4 percent of GDP in 2007).

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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