Press Release: IMF Approves Stand-By Credit for Panama
June 30, 2000
The International Monetary Fund (IMF) today approved a 21-month stand-by arrangement for Panama in an amount equivalent to SDR 64 million (about US$85.5 million) to support the government's economic program for 2000-01.The government of Panama requested the cancellation of the Extended Arrangement approved on December 11, 1997 (see Press Release No. 97/56) and has expressed its intention to treat the stand-by arrangement as precautionary.
In commenting on the Executive Board discussion, Eduardo Aninat, Deputy Managing Director, said:
"The new Panamanian government has adopted a credible and well-designed economic program with the main goals of increasing economic growth and alleviating poverty. The programmed reduction in the public sector deficit should achieve a substantial decline in the ratio of net public debt to GDP, and help lower Panama's risks premium on external debt. The program also provides for a substantial reduction in the external current account deficit.
"The government's goal of eliminating the public sector deficit in 2001 is a clear indication of its commitment to fiscal consolidation. The measures in the program to broaden the tax base and improve expenditure control play a crucial role in achieving the targeted reduction in the public sector deficit. The planned increase in expenditure on well-targeted social programs is welcome.
"The government's fiscal program is complemented by actions to resolve or address the problems of two important public financial institutions. The decision to appoint a commission on the financial problems of the social security system is timely and an important first step in addressing the impact of demographic trends on the system's finances.
"The authorities have made significant strides in developing a framework of financial regulation since the establishment of the Bank Superintendency in February 1998. It is important that they continue to move forcefully to strengthen financial supervision, particularly the supervision of offshore banking activities, and take actions, like those announced recently, to combat money laundering. Progress in these areas will be greatly welcomed by the financial community," Aninat said.
Panama's economy has experienced a decade of virtually uninterrupted growth and low inflation. Most recently, real GDP growth declined from 4.1 percent in 1998 to 3.2 percent in 1999, mainly because of the depressed demand for the reexport and processing activities of the Colon Free Zone resulting from the economic difficulties of neighboring countries. Despite the substantial increase in the prices of petroleum products over the past six months, the consumer price index increased by only 1.6 percent in the 12 months ending in May.
The reversion to Panama of the Canal Area and its assets at end-1999 has increased the country's capital stock and its economic growth potential. The authorities' program of economic and financial policies has been designed to capitalize on this increased potential and achieve a more equitable distribution of income, thereby reducing poverty.
The macroeconomic framework of the government's program targets an increase of GDP growth to 3.8 percent in 2000, 4.5 percent in 2001 and 5 percent in 2002, a low and stable inflation rate, and a substantial decline in the deficit on external current account. To this end, the authorities have adopted policies to preserve the fiscal consolidation already achieved, and raise the share of well-targeted social expenditure in total public spending.
The borrowing requirement of the nonfinancial public sector (NFPS) is programmed to decline from the equivalent of 1.4 percent of GDP in 1999 to 1 percent in 2000 and to be eliminated in 2001, and the ratio of net public sector debt to GDP declines from 50.2 percent in 1999 to 45.6 percent in 2001. The fiscal adjustment in 2000 relies mainly on expenditure restraint, while the adjustment programmed for 2001 relies on both tax measures and spending restraint.
The government's structural reform agenda comprises a series of measures that complement the fiscal adjustment planned for 2000-01, help keep the accounts of the NFPS in balance thereafter, and increase allocative efficiency. In particular, the automated system of financial control and management system is to be extended throughout the central government. The value-added-tax base is to be broadened, and the effective rate of taxation of the net income of banks increased. The government also plans to take the initial steps towards addressing the growing financial imbalances of the social security system. The authorities are committed to maintaining a sound financial system, and plan to take measures to apply more effectively the existing framework of prudential regulation and banking supervision.
The program includes well-targeted social expenditure programs to help in fighting poverty in Panama. The social investment program emphasizes educational and health expenditure, low-income housing, and potable water provision. A poverty map has recently been developed with the assistance of the World Bank to help ensure that schools and clinics are built in the regions, particularly rural areas, where they are most needed.
Panama joined the IMF on March 14, 1946. Its quota1 is equivalent to SDR 206.6 million (about US$276 million). Panama's outstanding use of IMF financing currently totals the equivalent of SDR 90.15 million (about US$120.5 million).