IMF Executive Board Concludes 2010 Article IV Consultation with Panama

Public Information Notice (PIN) No. 10/109
August 3, 2010

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 12, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama.1


Sound public finances and a strong banking system allowed Panama to face the global financial crisis of 2008 from a strong position. While GDP growth slowed in 2009, it remained positive at 2.5 percent and continued to surpass the region’s average. The unwinding of global supply shocks and weaker domestic demand led to a decline in inflation to about 2 percent. Inflation has risen somewhat in 2010, but remains low at about 3 percent (year over year) in May. The external current account improved markedly and was in balance, reflecting lower oil prices and very strong export growth from the Colon Free Zone. The overall fiscal deficit (excluding the Panama Canal Authority, PCA) was 1 percent of GDP in 2009, well below the deficit ceiling in the social and fiscal responsibility law (SFRL) for that year (2.5 percent of GDP).

The banking system remains on a strong footing, helped by effective supervision and a prudent stance by banks. Bank financial soundness indicators are solid, with high levels of capitalization and low non-performing loan rates. Growth of bank credit to the private sector decelerated in 2009, owing to tighter lending standards and weaker private demand. Credit growth, however, started to recover in the first quarter of 2010.

The new government has put in place two substantive tax reforms since taking office in July 2009. The reforms, which were approved in September 2009 and March 2010, seek to increase revenues to finance higher capital spending, while improving the efficiency of the tax system. Among other measures, they include broadening of the tax base, changes to dividend taxation, an increase in the value-added tax, lower personal and corporate income tax rates, and elimination of loopholes. The changes are expected to increase revenue by 2.25 percent of GDP on a permanent basis.

Panama’s credit rating was raised to investment grade in early 2010. The upgrade reflected the strengthening of the public finances in recent years, good prospects for further declines in public debt, and a very favorable growth outlook.

GDP growth is projected to pick up to 4.8 percent in 2010, supported by an improved world economy, a large increase in public investment, notably from the Canal expansion project, and a recovery of private demand. Inflation is expected to rise temporarily this year, driven by global trends and higher oil prices, but would remain low. The overall fiscal deficit is projected at 0.9 percent of GDP in 2010, well below the SFRL ceiling (2.5 percent of GDP) and the target envisaged in the budget (1.9 percent of GDP).

Executive Board Assessment

Executive Directors commended the authorities for their sound policies and appropriate policy response to the global financial crisis, which had helped mitigate the effect of the crisis on the economy and the financial sector. The timely implementation of policy measures, particularly in the fiscal area, contributed to the rapid recovery in economic activity and low unemployment. Directors also welcomed the improvement in Panama’s sovereign credit rating to investment grade. They stressed that maintenance of sound policies would provide the basis for continued strong economic growth and further reduction in poverty.

Directors agreed that, in light of the strength of the economic recovery, some withdrawal of fiscal stimulus in 2010 would be appropriate. They welcomed the adoption of a medium-term fiscal framework and the government’s ambitious plans for fiscal consolidation over the medium term. Directors noted that the targeted decline in public debt would create additional room for using fiscal policy as a countercyclical tool. They commended the authorities for the adoption of two comprehensive tax reforms during the past year, which would bolster the credibility of the fiscal framework. Directors also supported the authorities’ ongoing efforts to strengthen tax administration, and encouraged similar steps in the area of customs.

Directors welcomed the resilience of the banking system to the global financial crisis. To further bolster banking system stability and reduce costs to the economy from high liquidity holdings by banks, they welcomed work toward the establishment of a formal safety net, while keeping in mind moral hazard concerns. Directors supported the authorities’ plans to introduce risk-based supervision and adopt Basel II regulatory requirements. They also concurred with the initiative to broaden the financial regulation perimeter by bringing nonbank deposit-taking institutions under the umbrella of the Superintendency of Banks.

Directors welcomed the progress made toward removal from the Organization for Economic Cooperation and Development (OECD) gray list of tax havens. They encouraged the completion of remaining agreements and adoption of necessary legal changes.

Panama: Selected Economic Indicators





  2005 2006 2007 2008 2009 2010
(Percent change)

Production and prices







Real GDP (1996 prices)

7.2 8.5 12.1 10.7 2.4 4.8

Consumer price index (average)

2.9 2.5 4.2 8.8 2.4 3.3

Consumer price index (end of year)

3.4 2.2 6.4 6.8 1.9 3.0

Financial sector







Private sector credit

13.3 12.9 18.2 14.6 0.8 9.1

Broad money

8.5 21.5 15.9 18.5 13.4 10.0

Average deposit rate (1 year)

3.2 5.1 4.6 3.5 3.6 ...

Average lending rate (1 year)

8.2 8.6 9.0 8.5 7.5 ...

External trade 1/






Merchandise exports

11.9 14.3 11.7 5.2 -27.1 19.8

Merchandise imports

14.3 18.2 40.7 18.9 -15.2 22.7
(Percent of GDP)

Saving-investment balance







Gross domestic investment

18.4 19.5 24.1 27.4 24.8 26.7

Gross national saving

13.4 16.3 16.9 15.8 24.8 18.7

Nonfinancial public sector







Revenue and grants

24.3 26.8 29.7 29.2 27.4 27.8


25.9 25.6 25.0 26.7 27.9 29.8

Overall balance

-1.6 1.2 4.8 2.5 -0.5 -2.0

Overall balance, excluding ACP 2/

-2.6 0.5 3.4 0.4 -1.0 -0.9

Total public debt







Total debt

58.7 52.6 45.6 38.8 39.4 40.4

o/w external debt

45.5 40.5 37.4 32.7 36.5 38.5

External sector







Current account

-4.9 -3.1 -7.2 -11.6 0.0 -7.9

Net exports from Colon Free Zone

3.7 3.4 2.3 0.0 8.2 3.3

Net oil imports

3.4 3.1 4.4 5.9 3.6 4.4

Foreign direct investment

6.2 14.6 9.6 10.4 7.2 7.7

Memorandum items:







GDP (in millions of US$)

15,465 17,137 19,794 23,184 24,711 26,689

Sources: Comptroller General; Superintendency of Banks; and IMF staff estimates.
1/ Excludes the Colon Free Zone.

2/ Panama Canal Authority (ACP).

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. An explanation of any qualifiers used in summings up can be found here:


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