IMF Executive Board Concludes 2009 Article IV Consultation with Panama

Public Information Notice (PIN) No. 09/80
July 2, 2009

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 June 1, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama.1


Strong economic fundamentals helped contain the adverse impact of the global economic downturn and financial turmoil. Real GDP in 2008 grew by 9.2 percent, following an annual average growth of 8.8 percent in 2004-07. However, a decline in global trade and tighter credit conditions are becoming evident and real growth in 2009 is projected to slow to 3 percent. The high-growth period has led to a significant fall in poverty and a sharp decline in the unemployment rate, from 10.9 percent at the end of 2003 to 4.2 percent in August of 2008. Inflation, after peaking at 10 percent in September 2008, driven by the spike in international food and fuel prices and demand pressures, has declined rapidly and reached 3.7 percent in March 2009. The external current account deficit widened to 12.5 percent of GDP in 2008, as imports continued to increase at a relatively fast pace while exports slowed reflecting lower trade in the Colon Free Zone and a decline in external demand.

Panama’s large banking system has weathered the global financial crisis relatively well. The system is well-capitalized, highly liquid, and has strong financial soundness indicators. In addition, recent assessments by the Superintendency of Banks has not revealed exposure to complex structured assets. Following the intensification of the global financial crisis in September 2008, access to foreign credit lines declined, but the situation stabilized, and deposits and credit have been broadly stable. At the same time, banks have increased their holdings of liquidity partly to self insure and in response to higher perceived risk.

Public finances remained on strong footing and the nonfinancial public sector had a positive balance for the third subsequent year, albeit more modest than in 2007. Excluding the Panama Canal Authority (ACP), the nonfinancial public sector surplus in 2008 was equivalent to 0.4 percent. Continued robust revenues enabled a further large increase in public investment—from 5 percent of GDP in 2007 to 7 percent in 2008—and allowed for an increase in social spending of about 1 percent of GDP to partially offset the rapid increase in the cost of living. The rapid GDP growth, combined with the fiscal surplus, led to a further decline in the public debt-to-GDP ratio to 39 percent by end-2008.The Panama Canal expansion, estimated to cost US$5.3 billion, is broadly on track, and the external financing for the project has been secured on very favorable terms. A new Social and Fiscal Responsibility Law (SFRL)—enacted in June 2008—and a Public-Private Partnership (PPP) draft law that is being finalized, are important reforms that will further strengthen fiscal management over the medium term.

Executive Board Assessment

Executive Directors noted that Panama is facing the global economic crisis from a position of strength, with sound economic fundamentals helping to contain the adverse impact of the world economic downturn and financial turmoil. In particular, Directors commended the well-regulated banking sector, sustained fiscal consolidation, and Canal expansion project, which will allow Panama to preserve macroeconomic stability and continue growing during 2009, albeit at a slower pace than in recent years.

Directors noted the widening of the external current account deficit and the rise in inflation during 2008 was influenced by transitory factors. High imports and weak export performance were partly a reflection of the world food and fuel shock and the slowdown of external demand. Buoyant capital inflows, including foreign direct investment, more than financed the current account deficit, and inflation fell rapidly as world prices normalized. Looking forward, Directors noted that downside risks remain given the difficult global environment.

Directors commended the authorities for the fiscal consolidation of recent years and the associated rapid decline in the public debt-to-GDP ratio. They welcomed the continued strong revenue performance and one-off factors that had allowed a substantial increase in capital spending and social programs, which had supported activity and helped protect the poor despite the deterioration in the external environment. Directors also commended the authorities for securing external financing for the Panama Canal expansion project on very favorable terms, and for making good progress in the implementation of the project.

Directors welcomed the effective adoption of the Social and Fiscal Responsibility Law (SFRL) to help strengthen fiscal discipline, and enhance transparency and accountability. While recognizing the challenges of adhering to a fiscal deficit target of 1 percent of GDP during 2009, Directors encouraged the authorities to persevere in their efforts to comply with the target stipulated in the SFRL in order to bolster credibility of Panama’s new fiscal framework. Directors recommended that the authorities quickly adopt guidelines that would allow rapid modification of the fiscal deficit target should growth decelerate more rapidly than envisaged.

Directors welcomed the resilience of Panama’s financial system to the global financial crisis reflecting, in part, the relatively strong liquidity position of banks. They noted that reduced access to external credit lines had not unduly hampered the normal functioning of the system, and that while deposit and credit growth had slowed, they remained positive. Directors welcomed the steps taken to allow more timely monitoring of banks’ liquidity, asset quality, and risk management practices, as well as the rapid resolution of Stanford Bank-Panama. They also welcomed the timely adoption of the new Bank Law that will enhance cross border supervision and improve the bank resolution framework.

In light of ongoing external vulnerabilities and the absence of a lender of last resort, Directors encouraged continued vigilance and further strengthening of the banking system. They noted the authorities’ interest in creating a mechanism to provide emergency liquidity support for transitory liquidity shortages, which could reduce the banks’ need to self-insure.

Directors observed that the inclusion of Panama in a list of tax havens released by the OECD presented additional challenges. They welcomed the authorities’ intention to respond constructively, and called upon them to reach agreement on the steps needed to normalize its status.

Panama: Selected Economic Indicators

  2004 2005 2006 2007 2008 2009
  (Annual percentage change)

Real economy


Nominal GDP

9.6 9.1 10.8 13.7 18.5 8.5

Real GDP (1996 prices)

7.5 7.2 8.5 11.5 9.2 3.0

Consumer price index (end of year)

1.6 3.4 2.2 6.4 6.8 3.2

Unemployment (open)

9.2 7.6 6.7 4.7 4.2 ...

Money and credit


Broad money

8.6 8.5 21.5 15.9 18.4 8.8

Private sector credit

10.4 13.3 12.9 18.2 14.6 2.7

Average deposit rate (1 year)

2.5 3.2 5.1 4.6 3.8 ...

Average lending rate (1 year)

8.1 8.2 8.6 9.0 8.5 ...
  (In percent of GDP)

Saving and investment


Gross domestic investment

18.7 18.4 19.5 23.5 26.1 26.5

Gross national saving

11.2 13.4 16.3 16.2 13.7 16.8

External sector


Current account

-7.5 -4.9 -3.1 -7.3 -12.4 -9.6

Capital and financial account

-1.2 15.0 0.9 16.2 12.8 10.4

Real effective exchange rate (depreciation -)

-4.9 6.5 -4.7 -2.0 -2.0 ...

External public debt

47.6 45.5 40.5 38.0 32.9 32.2

Nonfinancial public sector


Revenue and grants

21.1 22.3 24.9 28.2 26.0 24.0


26.0 24.9 24.4 24.7 25.6 25.0

Balance, excluding Canal Authority

-4.9 -2.6 0.5 3.5 0.4 -1.0

Balance, Canal Authority 1/

1.0 1.0 0.7 1.3 2.1 0.1

Balance, including Canal Authority

-3.9 -1.6 1.2 4.8 2.5 -0.9

Total Public Debt

62.2 58.3 52.6 46.4 39.0 36.9

Memorandum item:


GDP, in millions of US$

14,179 15,465 17,134 19,485 23,088 25,051

Sources: Office of the Comptroller General; Superintendency of Banks; and Fund staff estimates and projections.
1/ Balance of Canal Authority, after transfers of Canal fees and distribution of profits to the government.

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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