IMF Executive Board Concludes 2012 Article IV Consultation with Panama

Public Information Notice (PIN) No. 13/28
March 13, 2013

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 January 25, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama.1


Panama’s growth performance continues to exceed expectations, buoyed by the Panama Canal expansion and large public infrastructure projects. Annual real Gross Domestic Product (GDP) growth averaged about 9 percent over the past five years, the highest in Latin America. Unemployment is at historic lows, and the output gap has closed. Rapid economic growth and stronger social safety nets have helped reduce poverty. Over the medium-term, recent and forthcoming Free-Trade Agreements with major trading partners are expected to boost trade in services and Foreign Direct Investment (FDI). The recent creation of a Sovereign Wealth Fund to save additional revenue from the expanded Canal aims at further strengthening the economy’s resilience to external shocks.

Panama’s economy expanded by 10.6 percent in 2011, and continued to grow at the same pace in the first three quarters of 2012. Construction, commerce, and transportation, storage and communications have been the most dynamic sectors. Canal traffic and activity in the Colón Free Zone have been supported by strong demand from South America and emerging Asia. Rising world commodity prices and domestic demand pressures have kept inflation at relatively high levels through 2011 and most of 2012. Headline and core inflation started declining in the third quarter, mostly owing to lower food and domestic services price pressures, with inflation in 2012 projected at 5 percent (year-on-year). Panama’s financial sector remains well-prepared to absorb even large external shocks; banks remain well-capitalized, liquid and profitable. After widening to 12.8 percent of GDP in 2011, the current account deficit improved somewhat in the first nine months of 2012. A sharp improvement in the goods and services balances was almost offset by a deterioration in the income balance, associated with a 56 percent increase in FDI flows.

Panama’s baseline outlook is positive, with broadly balanced risks. Implementation of large public infrastructure projects and strong domestic demand in the context of loose imported monetary conditions are expected to continue to support growth and domestic demand. Overheating pressures would moderate as public investment unwinds. At the same time, the global economy remains weak, and downside risks have intensified. Panama’s trade and financial openness increases the country’s vulnerability to external shocks, though strong domestic fundamentals would mitigate their impact. A key medium-term challenge is to ensure the transition to more sustainable and inclusive growth, including through further improvements in education and training.

Executive Board Assessment

The Executive Directors commended Panama’s impressive economic performance over the past decade, underpinned by strong fundamentals and sound policies. Large public investments are expected to continue to drive growth this year, despite a weak external environment. Directors encouraged the authorities to take advantage of the favorable conjuncture to strengthen policies and buffers. They agreed that, in the near term, policies need to be geared toward building up fiscal space and enhancing crisis prevention tools. Going forward, a key challenge will be to foster sustained and more inclusive growth.

Directors saw merit in a tighter fiscal stance for 2013–14 to forestall overheating and recommended keeping overall deficits below the revised ceilings. Further improvements in tax administration and expenditure management could support the needed adjustment. More broadly, Directors agreed that frequent revisions to the legal deficit ceilings could undermine the credibility of the fiscal framework. They also agreed that the recently-established sovereign wealth fund would help reduce policy pro-cyclicality and further shield the economy from shocks going forward.

Considering Panama’s extensive financial linkages, Directors emphasized the importance of further strengthening the financial safety net. They welcomed the progress in implementing the recommendations from the 2011 Financial Sector Assessment Program, including the plans to establish a facility for emergency liquidity assistance. Directors also acknowledged recent steps to enhance the monitoring of systemic risks and noted the importance of closing existing data gaps. Improving the supervision of non-banks, strengthening the mandate of the Council of Supervisors, and further developing macroprudential tools remain important policy priorities. Directors also welcomed the ongoing efforts to upgrade tax transparency and the legal framework for combating money laundering and the financing of terrorism.

Directors welcomed recent and prospective trade agreements between Panama and its major trading partners that should help support inward foreign direct investment and ensure sustained growth as large public projects unwind. Directors took note of the staff’s assessment that the projected current account deficit and external debt paths are consistent with medium-term external sustainability but that further appreciation of the real exchange rate could undermine recent gains in external competitiveness.

Directors underscored the importance of continued efforts to reduce poverty and inequality, and to tackle youth unemployment. In this context, ongoing training and education reforms should help alleviate skills mismatches, while targeted assistance to the poorest through conditional cash transfers should improve living standards in rural and indigenous areas.

Panama: Selected Economic Indicators
  2009 2010 2011 2012
  (Annual percent change)

Real economy


Nominal GDP

5.0 10.0 15.0 17.9

Real GDP (1996 prices)

3.9 7.6 10.6 10.7

Consumer price index (average)

2.4 3.5 5.9 5.7

Consumer price index (end-of-year)

1.9 4.9 6.3 4.6

Money and credit


Private sector credit

1.3 13.6 16.8 17.5

Broad money

9.4 11.6 8.1 11.7

Average deposit rate (1-year)

3.1 3.5 2.7

Average lending rate (1-year)

7.5 7.5 6.9
  (Percent of GDP)

Saving and investment


Gross domestic investment 1/

25.6 26.0 29.0 29.0

Gross national saving

24.9 15.2 16.2 17.0

Nonfinancial public sector





Revenue and grants

33.5 33.1 32.9 31.9


33.9 36.4 38.4 37.0

Current, including interest

24.5 24.5 24.4 24.2


9.4 12.0 14.0 12.8

Overall balance

-0.5 -3.4 -5.5 -5.1

Overall balance, excluding ACP

-1.0 -1.9 -2.3 -2.9

External sector





Current account

-0.7 -10.8 -12.8 -12.0

Capital and financial account

1.4 11.1 13.8 12.1

Real effective exchange rate (depreciation -)

1.9 -2.3 1.7 ...

External public debt 2/

42.0 40.4 38.6 33.1

Memorandum items:





GDP (in millions of US$)

24,163 26,590 30,569 36,028

Sources: Comptroller General; Superintendency of Banks; and IMF staff estimates.

1/ Includes Panama Canal Authority (ACP).

2/ Including ACP and net of Fiduciary Fund' holdings of non-government assets.

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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