## 1. Expansion of the Panama Canal: Maintaining Panama’s Competitiveness as a Major World Trade Route

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### Expansion project and immediate implications
- 50-mile Panama Canal expansion over 2007-2016 with investment of about $5.3 billion in new locks and other supporting infrastructure.
- Designed to accommodate larger “post-Panamax” vessels that could not transit through the original Canal.
- Expanded Canal began commercial operations on June 26, 2016.
- Lower toll structure implemented in April 2016 to capture market share.
- Near-term gains depend on Canal’s ability to regain market share lost as the shipping industry transitioned to larger ships or to divert trade traffic to the Canal.
- Expanded Canal opens opportunities for emerging activities, such as LPG and LNG vessels, and may have spillovers to logistics and ports.

### Recent macroeconomic developments affecting Canal-related activity
- Growth decelerated from 5.8 percent in 2015 to 4.9 percent in 2016; weaker-than-expected Canal-related activity following the opening of the expanded Canal was a main factor.
- Colon Free Zone (CFZ) underperformed and contributed to slower activity.
- Construction, financial intermediation, commerce, and other services remained buoyant.
- Unemployment increased slightly to 5.5 from 5.1 percent in 2015 as the output gap turned slightly negative.
- Average headline inflation in 2016 was 0.7 percent, driven by low fuel prices, weaker activity, and the strong dollar; wage adjustments led to a slight increase in unit labor costs in 2016.
- REER appreciation of 0.8 percent in 2016 (excluding Venezuela) due to continued U.S. dollar strength; survey-based indicators and productivity developments suggest Panama remains internationally competitive.
- Current account deficit narrowed to 5.6 percent of GDP, from a peak of 13.7 percent in 2014; improvement largely associated with a decline in investment-related imports and lower energy-related imports.
- Canal toll revenues and canal activity rose swiftly since late 2016 despite slower-than-expected ramp up immediately after opening.

### Fiscal developments and public finances
- Overall unadjusted deficit for the non-financial public sector (NFPS) in 2016 estimated to have narrowed to 2.2 percent of GDP.
- Adjusted deficit remained below the maximum allowed under the Social Fiscal Responsibility Law (SFRL).
- Improvements in revenue administration, partial VAT withholding, and an upgraded tax filing system supported the strongest tax revenue performance over the last three years.
- Stronger revenue performance helped narrow the overall deficit despite increased expenditure from public investment execution and higher public wages.
- Fiscal policy had a slightly contractionary impact amid a widening output gap.
- Higher revenues from the expanded Canal in 2017 of about 2.7 percent of GDP are projected to support consolidation.
- Overall NFPS deficit projected to gradually decline to about 1 percent of GDP over the medium term.
- Public debt projected to remain below the SFRL target of 40 percent of GDP (net debt projected to remain below the SFRL target).

Key fiscal projections (percent of GDP):
- Revenue: 20.4 (2015), 20.5 (2016), 21.3 (2017), 21.1 (2018), 21.2 (2019), 21.2 (2020), 21.2 (2021), 21.1 (2022).
- Expenditure: 22.8 (2015), 22.7 (2016), 23.0 (2017), 22.4 (2018), 22.4 (2019), 22.3 (2020), 22.3 (2021), 22.0 (2022).
- Overall balance: -2.3 (2015), -2.2 (2016), -1.7 (2017), -1.3 (2018), -1.2 (2019), -1.1 (2020), -1.1 (2021), -1.0 (2022).
- Structural primary balance: -0.8 (2015), -0.5 (2016), -0.1 (2017), 0.2 (2018), 0.2 (2019), 0.3 (2020), 0.3 (2021), 0.4 (2022).
- NFPS gross debt: 38.8 (2015), 38.8 (2016), 38.0 (2017), 36.5 (2018), 35.3 (2019), 34.0 (2020), 32.8 (2021), 31.5 (2022).
- NFPS net debt: 36.1 (2015), 36.3 (2016), 35.6 (2017), 34.4 (2018), 33.3 (2019), 32.2 (2020), 31.0 (2021), 29.9 (2022).

### Financial sector, credit cycle, and macro-financial risks
- Prolonged credit expansion outpaced deposit growth; cost of funding rose, prompting banks to raise lending rates and tighten credit supply.
- Credit demand slowed; credit growth started to decelerate.
- Deceleration mainly due to banks cutting exposures to the CFZ; household borrowing continues to fuel credit growth.
- Assessment of macro-financial risks from rapid household credit increase hindered by lack of data on property prices, household debt service, and loan-to-value ratios.
- Anecdotal evidence suggests property prices have risen in tandem with credit; commercial mortgages account for only 3.5 percent of GDP.
- Offsetting factors: banks’ conservative lending practices (traditionally low loan-to-value ratios) and automatic payroll deductions limiting household debt service to 50 percent of income.

Selected banking indicators and trends:
- Financial sector assets: 238 percent of GDP.
- Banks represent about 90 percent of system assets; offshore banks hold about 16 percent of bank assets.
- Non-performing loans (banking system): 1.3 (Dec.2012), 1.1 (Dec.2013), 1.3 (Dec.2014), 1.1 (Dec.2015), 1.3 (Dec.2016).
- Ratio of provisions to NPLs (banking system): series including 80.6 (Dec.2016).
- Net income on average assets (banking system): series showing 1.3 (Dec.2016).
- Ratio of liquid assets to total assets (banking system): series showing 16.7 (Dec.2016).
- Ratio of capital to risk-weighted assets (banking system): ranges with Dec.2016 at 15.0.

### Mossack Fonseca and Waked events: economic impact and policy implications
- Release of Mossack Fonseca documents (April 3, 2016) and U.S. sanctions on the Waked Money Laundering Organization (May 3, 2016) highlighted need to strengthen tax transparency and AML/CFT.
- Direct economic impacts appear limited:
  - Legal services related to incorporations estimated at about 0.7 percent of GDP and tied to a very small cluster of activities.
  - A Panamanian bank designated by U.S. authorities as part of the Waked organization was intervened in 2016, but the banking system remained sound.
  - Banking system assets continue to grow and deposits have remained stable; banks have maintained access to correspondent banking relationships (CBRs).
  - FDI grew 15.9 percent year-over-year in 2016, reaching 10.7 percent of GDP.
  - 2016 saw the highest number of newly-established regional headquarters of multinational companies since special incentives introduced in 2007.
  - Panama’s EMBI spread has remained stable, indicating continued investor confidence.
- Authorities continued progress on tax transparency and AML/CFT and pursued criminal investigations into firms and individuals involved.

### Outlook and risks related to the Canal and broader economy
- Growth expected to rise slightly to 5.1 percent in 2017, supported by a large mining project and the expanded Canal.
- Medium-term growth of about 5.5 percent expected, reflecting diversified activities including logistics and tourism.
- Inflation: with projected normalization of fuel prices, expected to pick up to about 2 percent in 2017 and then return to projected medium-term range of 2–2.5 percent.
- Current account deficit expected to realign with estimated norm, narrowing to about 3 percent of GDP over the medium term.
- FDI expected to continue financing the deficit.

Selected pipeline and project figures:
- Planned and ongoing large-scale investment projects total 16.68 (value) and represent 30.26 % of 2016 GDP (Total 16.68  % of 2016 GDP30.26).
- Examples (value; status): Minera Panama 5.50 ongoing; Metro line 2 2.10 ongoing; Metro line 3 2.60 planned; 4th bridge over the canal 1.20 planned; Tocumen terminal expansion 0.90 ongoing.

Risks:
- Ramp-up in Canal activity slower than initially expected; future gains depend on regaining/diverting market share and world trade growth.
- External competitiveness influenced by REER movements and global shipping economics (e.g., low oil prices enhancing alternative routes).
- Macro-financial risks from household credit expansion and limited data on property and household leverage.
- Reputational and AML/CFT risks from Mossack Fonseca and Waked events require continued policy action.

---

### Policy priorities and reform discussions

### Strengthening tax transparency and financial integrity (Policy Discussion A)
- Immediate reforms and commitments:
  - Panama committed to implement automatic exchange of tax information (AEOI) by 2018, ratified the OECD’s Multilateral Convention on Tax Matters, and an agreement with the U.S. to implement FATCA.
  - National Assembly adopted legislation to establish legal basis for AEOI, enhance revenue administration powers, and oblige all companies and foundations registered in Panama to keep accounting records.
  - Implementing legislation expected to be finalized in the first half of 2017.
- Compliance priorities:
  - Panama must obtain at least a “partially compliant” rating in the Global Forum’s fast-track assessment in mid-2017, following a “non-compliant” rating covering the period until June 2015.
  - Critical: availability of ownership and identity information, reliable accounting records for all relevant entities, and an effective mechanism for information exchange.
  - Strengthening revenue administration’s human, procedural, and ICT capacities is important.
- AML/CFT:
  - Legislative reforms in 2015 strengthened AML/CFT framework but gaps remain, notably to make tax crimes a predicate offence to money laundering.
  - National Commission finalized the national risk assessment in January 2017; national AML/CFT strategy expected by mid-2017.
  - In May 2017, Panama will be assessed on effective implementation of the 2012 FATF standard by GAFILAT.
- Authorities reiterated full commitment to tax transparency and financial integrity.

### Supporting sustainability with an enhanced fiscal framework (Policy Discussion B)
- Fiscal stance and rule:
  - Ongoing consolidation path consistent with the fiscal rule is broadly appropriate.
  - Fiscal policy turned slightly pro-cyclical in the last two years, but the mildly contractionary stance demonstrates commitment to fiscal discipline.
  - Authorities refrained from fully using the fiscal space created by the 2012 modification to the rule.
- Fiscal risks and contingent liabilities:
  - Defined-benefit part of the public pension system projected to deplete its reserves by 2027 and start generating expenditure pressures thereafter.
  - Unfunded pension liabilities need parametric reform to avoid crowding out other public spending.
  - Turnkey contracts: publishing information on different project stages would allow more accurate assessment of fiscal policy’s impact.
  - Need comprehensive assessment of all contingent liabilities of the consolidated public sector to ensure SFRL debt target results in adequate buffers.
- Fiscal council proposal:
  - Authorities preparing draft legislation to introduce a fiscal council to publicly assess and monitor fiscal assumptions, plans and performance, including implementation of the fiscal rule.
  - Ensuring legal and operational independence and adequate resources are essential.
- Revenue mobilization:
  - Continued progress in strengthening tax administration essential to finance strategic public investment.
  - VAT collection increased by 17.5 percent.
  - Panama’s tax-to-GDP ratio, at about 10 percent, remains among the lowest in the region.
  - Proposed measures: introduce electronic invoicing and modernize IT systems; review and streamline tax incentives and exemptions starting with publishing a list of estimated foregone revenues.
- Customs administration:
  - Customs revenue collection declined significantly; institutional weaknesses remain and reforms are needed.
- Authorities expect draft legislation for the fiscal council to be considered by the National Assembly in mid-2017.
- Electronic invoicing pilot version scheduled to be unveiled by end-2017.

### Strengthening financial sector oversight and crisis management (Policy Discussion C)
- Prudential regulations largely aligned with Basel III; new regulations anticipated in second half of 2017 to complete alignment, including:
  - introduction of the liquidity coverage ratio, with implementation expected in 2018;
  - capital charges for market and operational risk.
- Coordination of systemic financial stability monitoring:
  - Financial Coordination Council (FCC) enhancing oversight of financial conglomerates and information exchange; MOUs being finalized and joint inspections planned in 2017.
  - Over the medium term, moving toward a more centralized supervisory structure recommended.
- Monitoring, stress tests, and data gaps:
  - SBP progress: intensified monitoring with early warning indicators; stress tests with baseline, moderate stress and severe stress scenarios; a new financial stability index.
  - Stress tests conclude banks’ capital, on average, would remain adequate even under severe shocks.
  - Data gaps hinder monitoring, especially household-level data on income and indebtedness and property prices.
- Macroprudential framework and tools:
  - Establish a macroprudential framework.
  - Recommendations: consider additional capital buffers for systemically important institutions; prioritize development of tools targeted at household sector.
  - Possible tools (dependent on improved data): limits on loan-to-value ratios; maximum debt-to-income ratios; debt-service-to-income ratios.
- Crisis management and financial safety net:
  - Panama lacks a central bank and a lender of last resort.
  - Banco Nacional de Panama introduced a $500 million repo facility in 2016; coverage inadequate for systemic shocks.
  - Deposit insurance remains an important gap.
  - Need to upgrade SBP’s resolution powers and elaborate a crisis management plan coordinated by the FCC.
- Authorities agree on importance of strengthening oversight but indicate crisis management framework unlikely to be updated in near-term due to moral hazard and funding concerns.

Staff appraisal priorities and recommendations:
- Fully align prudential regulations with Basel III.
- Deepen coordination of microprudential supervision across supervisors to include systemic risk monitoring.
- Develop macroprudential policy tools targeted at financial conglomerates and household debt.
- Strengthen crisis management by establishing a temporary liquidity facility, improving SBP’s resolution powers, introducing deposit insurance, and developing coordination frameworks for supervisory agencies’ responses.

---

### External stability, DSA, stress tests, and risk assessment

### Annex I — External position and current account developments
- External position moderately weaker than fundamentals but on track to return to norm over medium-term.
- Current account deficit: declined to 5.6 percent of GDP in 2016, from 13.7 percent in 2014.
- Goods exports dropped to 4.3 percent of GDP in 2016 after averaging almost 9 percent of GDP over the prior decade.
- Service exports stable at 26.5 percent of GDP in 2016.
- CFZ loss of competitiveness contributed about 1.5 percentage points to decline in goods exports.
- Financing structure: deficit predominantly financed by FDI; FDI robust in 2016 at 9.2 percent of GDP.
- Panama’s net IIP estimated at 71.8 percent of GDP in 2016.
  - IIP-stabilizing current account deficit implied: 5.4 percent of GDP (stabilize at 2016 level).
  - Reducing net IIP to 65 percent of GDP implies IIP-stabilizing current account deficit of 4.9 percent of GDP.
- Panama fully dollarized; nominal effective exchange rate appreciated by 1 percent from end-2015 to end-2016; real effective exchange rate appreciated by 0.8 percent.
- Excluding Venezuela: nominal effective exchange rate appreciated by 5.8 percent; REER depreciated by 7 percent.
- Reserve adequacy metrics (actual coverage 2016 versus benchmarks):
  - Months of imports benchmark = 3 months; actual coverage 2016 = 2.9
  - Broad Money benchmark = 20%; actual coverage 2016 = 11.3
  - Short-term debt benchmark = 100 percent; actual coverage 2016 = 43.2
  - IMF reserve adequacy metric benchmark = 100–150 percent; actual coverage 2016 = 50.1
  - Gross external debt, billions of USD: 2016 = 56.8
  - Additional reserves needed to reach IMF reserve adequacy metric of 100 percent, billions of USD = 4.3
- Recommendations: build policy buffers, establish a systemic liquidity facility for banks, develop contingency plan to coordinate response to large shocks.

### Annex II — Debt Sustainability Analysis (DSA) — baseline and medium-term
Baseline outcomes and drivers:
- Public debt expected to decline from close to 39 percent of GDP in 2016 to about 32½ percent of GDP by 2022.
- Key drivers: favorable growth outlook, primary fiscal surpluses in line with SFRL targets, favorable automatic debt dynamics from negative interest rate/growth differential.
- Contribution to total debt reduction (6¼ percent of GDP):
  - Automatic debt dynamics: about 5 percent of GDP.
  - Fiscal consolidation: an additional 1.1 percent of GDP.
- Selected macro assumptions:
  - Real GDP growth: 2016 = 4.9 percent; 2017 = 5.1 percent; medium-term about 5½ percent.
  - Inflation (GDP deflator): 2017 = about 2 percent; medium-term 2–2½ percent.
- Selected nominal gross public debt (percent of GDP): 2016 = 38.8; 2017 = 38.8; 2018 = 38.4; 2019 = 37.1; 2020 = 35.9; 2021 = 34.7; 2022 = 32.6.
- Public gross financing needs (percent of GDP): 2016 = 3.6; 2017 = 2.9; 2018 = 3.2; 2019 = 3.3; 2020 = 5.0; 2021 = 6.8; 2022 = 7.0.

Primary balance path (percent of GDP):
- Primary deficit/surplus: 2017 = 0.6 (primary deficit in table shows 0.6 for 2017); 2018 = 0.3; 2019 = -0.1; 2020 = -0.2; 2021 = -0.3; 2022 = -0.4.

### DSA stress tests — key scenarios and outcomes
1. Financial contingent liability shock
- Shock components:
  - Near-term increase in non-interest public expenditure equal to 10 percent of the banking system’s assets in 2018.
  - One-standard deviation shock to real GDP growth in 2018–2019.
  - Interest rate increase by 25 basis points for each percent of GDP deterioration in the primary fiscal balance.
- Result:
  - Public debt rises to almost 50 percent of GDP in 2018–2019; debt falls to 45.5 percent of GDP by 2022.
- Selected scenario entries:
  - Real GDP growth: 2017 = 5.1%; 2018 = 2.4%; 2019 = 2.6%; 2020 = 5.6%; 2021 = 5.5%; 2022 = 5.5%
  - Primary Balance: 2017 = -0.3%; 2018 = -10.5%; 2019 = 0.2%; 2020 = 0.3%; 2021 = 0.3%; 2022 = 0.4%

2. Combined real GDP growth and financial conditions shock
- Shock design:
  - Drop in GDP growth by 2 percentage points each year over 2018–2022.
  - Increase in the interest rate of 400 basis points compared to baseline.
- Result:
  - Public debt follows a higher trajectory but still trends downwards, dropping to 37 percent of GDP over the medium term.
- Selected scenario entries:
  - Real GDP growth: 2017 = 5.1; 2018 = 3.6; 2019 = 3.8; 2020 = 3.6; 2021 = 3.5; 2022 = 3.5
  - Interest rate shock: 2018–2022 = 400 bpts each year

3. Contingent liabilities of SOEs shock
- Shock design:
  - Government covers contingent liabilities of public companies excluded from the NFPS and a newly-established liquidity facility at BNP.
  - Increase in non-interest expenditure of about 4.6 percent of GDP in 2018.
- Result:
  - Debt rises but remains on downward path to about 37 percent of GDP in 2022.
- Selected scenario entries:
  - Real GDP growth: 2017 = 5.1%; 2018 = 5.6%; 2019 = 5.8%; 2020 = 5.6%; 2021 = 5.5%; 2022 = 5.5%
  - Non-interest expenditure-to-GDP ratio: 2018 = 25.4% (spike in 2018), then returns toward baseline

### External debt sustainability (selected baseline projections)
- External debt-to-GDP: 2016 = 102.9; 2017 = 98.7; 2018 = 94.0; 2019 = 89.3; 2020 = 83.5; 2021 = 79.6.
- Gross external financing need (percent of GDP): 2016 = 32.5; 2017 = 30.2; 2018 = 36.4; 2019 = 31.5; 2020 = 33.3; 2021 = 23.8.
- Market indicators (2016 values in panel): EMBIG = 134 bp; External financing requirement = 12 (percent of GDP); Public debt held by non-residents = 33 percent; Annual change in short-term public debt = 0.5 (percent); Public debt in foreign currency = 12 percent.

---

### Risks, authorities’ views, and implementation of prior IMF advice

### Risks are tilted to the downside (domestic and external)
Domestic risks:
- Reputational and financial integrity risks from failure to continue progress on tax transparency and AML/CFT.
- Real estate and leverage risks: oversupply in property market could trigger price correction; combined with elevated household and corporate leverage and rising interest rates, could affect financial stability.
- Financial stability transmission: pressures on CBRs could adversely affect Panama’s international financial center.

External risks:
- Weaker-than-expected global growth and retreat from cross-border integration could slow Canal activity, dampening growth and government revenue.
- U.S. monetary and tax policy: faster-than-expected U.S. monetary tightening and dollar appreciation could put upward pressure on Panama’s REER and erode competitiveness; changes to U.S. corporate tax rules could reduce FDI into Panama.
- Rise in global interest rates would push Panamanian interest rates up and contribute to turning of the credit cycle.

Authorities’ views:
- Authorities broadly share staff’s views but are more optimistic about growth prospects for 2017 and medium term, based on stronger projection for expanded Canal activity and expected regional recovery.
- Authorities agreed on external stability and public debt sustainability assessments and reiterated commitment to tax transparency and financial integrity.

### Implementation of past IMF policy advice (Annex III and Annex V highlights)
- Tax transparency and financial integrity: ratified OECD Multilateral Convention on Tax Matters; ratified FATCA agreement with U.S.; signed first bilateral AEOI agreement with Japan; National Assembly adopted key legislation for AEOI; finalized national AML/CFT risk assessment.
- Fiscal policy: prepared draft legislation for fiscal council; improvements in tax administration and partial VAT withholding increased revenues; authorities refrained from tax amnesties; not yet reviewed tax incentives/exemptions.
- Financial sector reforms: prudential regulations further aligned with Basel III; new regulations to introduce capital charges for market and operational risk and liquidity coverage ratio anticipated; FCC established in 2012; SBP strengthened systemic risk oversight and is addressing data gaps.
- FSAP recommendations (implementation status):
  - Liquidity facility: $500 million repo facility created by Banco Nacional in 2016 (general repo facility).
  - Deposit insurance: no initiatives so far.
  - Regulatory and supervisory upgrades across banking, insurance, securities, payments and market infrastructure described with timelines and legislative steps.

---

*International Monetary Fund — IMF Country Report excerpt (staff report and annexes as presented in the provided content unit).*

### 1. Expansion of the Panama Canal: Maintaining Panama’s Competitiveness as a Major World

### 1. Expansion of the Panama Canal: Maintaining Panama’s Competitiveness as a Major World Trade Route

### Expansion project and immediate implications
- The 50-mile Panama Canal underwent a major expansion over 2007-2016 with investment of about $5.3 billion in new locks and other supporting infrastructure.
- The expansion was designed to accommodate larger “post-Panamax” vessels that could not transit through the original Canal.
- The expanded Canal began commercial operations on June 26, 2016.
- A lower toll structure designed to capture market share was implemented in April 2016.
- Near-term gains depend on the Canal’s ability to regain market share lost as the shipping industry transitioned to larger ships or to divert trade traffic to the Canal.
- The expanded Canal opens opportunities for emerging activities, such as LPG and LNG vessels, and may have spillovers to logistics and ports.

### Recent macroeconomic developments affecting Canal-related activity
- Growth decelerated from 5.8 percent in 2015 to 4.9 percent in 2016; weaker-than-expected Canal-related activity following the opening of the expanded Canal was a main factor.
- The Colon Free Zone (CFZ) also underperformed and contributed to slower activity.
- Construction, financial intermediation, commerce, and other services remained buoyant.
- The unemployment rate increased slightly to 5.5 from 5.1 percent in 2015 as the output gap turned slightly negative.
- Average headline inflation in 2016 was 0.7 percent, driven by low fuel prices, weaker activity, and the strong dollar; wage adjustments led to a slight increase in unit labor costs in 2016.
- REER appreciation of 0.8 percent in 2016 (excluding Venezuela) occurred due to continued U.S. dollar strength; survey-based indicators and productivity developments suggest Panama remains internationally competitive.
- Current account deficit narrowed to 5.6 percent of GDP, from a peak of 13.7 percent in 2014; improvement largely associated with a decline in investment-related imports and lower energy-related imports.
- Canal toll revenues and canal activity rose swiftly since late 2016 despite a slower-than-expected ramp up immediately after opening.

### Fiscal developments and public finances
- The overall unadjusted deficit for the non-financial public sector (NFPS) in 2016 is estimated to have narrowed to 2.2 percent of GDP.
- The adjusted deficit remained below the maximum allowed under the Social Fiscal Responsibility Law (SFRL).
- Improvements in revenue administration, partial VAT withholding, and an upgraded tax filing system supported the strongest tax revenue performance over the last three years.
- Stronger revenue performance helped narrow the overall deficit despite increased expenditure from public investment execution and higher public wages.
- Fiscal policy had a slightly contractionary impact amid a widening output gap.
- Fiscal table projections (percent of GDP):
  - Revenue: 20.4 (2015), 20.5 (2016), 21.3 (2017), 21.1 (2018), 21.2 (2019), 21.2 (2020), 21.2 (2021), 21.1 (2022).
  - Expenditure: 22.8 (2015), 22.7 (2016), 23.0 (2017), 22.4 (2018), 22.4 (2019), 22.3 (2020), 22.3 (2021), 22.0 (2022).
  - Overall balance: -2.3 (2015), -2.2 (2016), -1.7 (2017), -1.3 (2018), -1.2 (2019), -1.1 (2020), -1.1 (2021), -1.0 (2022).
  - Structural primary balance: -0.8 (2015), -0.5 (2016), -0.1 (2017), 0.2 (2018), 0.2 (2019), 0.3 (2020), 0.3 (2021), 0.4 (2022).
  - NFPS gross debt: 38.8 (2015), 38.8 (2016), 38.0 (2017), 36.5 (2018), 35.3 (2019), 34.0 (2020), 32.8 (2021), 31.5 (2022).
  - NFPS net debt: 36.1 (2015), 36.3 (2016), 35.6 (2017), 34.4 (2018), 33.3 (2019), 32.2 (2020), 31.0 (2021), 29.9 (2022).
- Higher revenues from the expanded Canal in 2017 of about 2.7 percent of GDP are projected to support consolidation.
- The overall NFPS deficit is projected to gradually decline to about 1 percent of GDP over the medium term.
- Public debt is projected to remain below the SFRL target of 40 percent of GDP (net debt projected to remain below the SFRL target).

### Financial sector, credit cycle, and macro-financial risks
- Panama experienced a prolonged credit expansion that outpaced deposit growth; recently the cost of funding rose, leading banks to raise lending rates and tighten credit supply.
- Credit demand has slowed, linked to moderation in economic activity, and credit growth has started to decelerate.
- Deceleration in credit growth has been primarily related to banks cutting exposures to the CFZ; household borrowing continues to fuel credit growth.
- Assessment of macro-financial risks from rapid household credit increase is hindered by lack of data on property prices, household debt service, and loan-to-value ratios.
- Anecdotal evidence suggests property prices have risen in tandem with credit; commercial mortgages account for only 3.5 percent of GDP.
- Offsetting factors include banks’ conservative lending practices (traditionally low loan-to-value ratios) and automatic payroll deductions limiting household debt service to 50 percent of income.

### Mossack Fonseca and Waked events: economic impact and policy implications
- The release of Mossack Fonseca documents (April 3, 2016) and U.S. sanctions on the Waked Money Laundering Organization (May 3, 2016) highlighted the need to strengthen tax transparency and AML/CFT.
- Direct economic impacts appear limited:
  - Legal services related to incorporations are estimated at about 0.7 percent of GDP and are tied to a very small cluster of activities.
  - A Panamanian bank designated by U.S. authorities as part of the Waked organization was intervened in 2016, but the banking system remained sound.
  - Banking system assets continue to grow and deposits have remained stable; banks have maintained access to correspondent banking relationships (CBRs).
  - FDI grew 15.9 percent year-over-year in 2016, reaching 10.7 percent of GDP.
  - 2016 saw the highest number of newly-established regional headquarters of multinational companies since the introduction of special incentives in 2007.
  - Panama’s EMBI spread has remained stable, indicating continued investor confidence.
- Authorities have continued progress on tax transparency and AML/CFT and pursued criminal investigations into firms and individuals involved.

### Outlook and risks related to the Canal and broader economy
- Growth is expected to rise slightly to 5.1 percent in 2017, supported by a large mining project and the expanded Canal.
- Medium-term growth of about 5.5 percent is expected, reflecting diversified activities including logistics and tourism.
- With projected normalization of fuel prices, inflation is expected to pick up to about 2 percent in 2017 and then return to the projected medium-term range of 2–2.5 percent.
- Balance of payments outlook:
  - Current account deficit expected to realign with the estimated norm, narrowing to about 3 percent of GDP over the medium term.
  - Decline driven largely by diversification of exports into primary commodities as a new mine begins exporting.
  - Continued recovery in global growth should support service exports and help offset an increase in imports associated with rising global commodity prices.
  - FDI is expected to continue financing the deficit.
- Medium-term investment pipeline and major projects:
  - Listed planned and ongoing large-scale investment projects total 16.68 (value) and represent 30.26 % of 2016 GDP according to the project table (Total 16.68  % of 2016 GDP30.26).
  - Examples and estimated values (value; status): Minera Panama 5.50 ongoing; Metro line 2 2.10 ongoing; Metro line 3 2.60 planned; 4th bridge over the canal 1.20 planned; Tocumen terminal expansion 0.90 ongoing; plus other public and private projects.
- Risks:
  - Ramp-up in Canal activity was slower than initially expected; future gains depend on regaining/diverting market share and on world trade growth.
  - External competitiveness influenced by REER movements and global shipping economics (e.g., low oil prices enhancing alternative routes).
  - Macro-financial risks from household credit expansion and limited data on property and household leverage.
  - Reputational and AML/CFT risks from Mossack Fonseca and Waked events require continued policy action.

*International Monetary Fund — IMF Country Report excerpt*

### 13.      Risks are tilted to the downside (see Annex III and Selected Issues Paper II):

### 13.      Risks are tilted to the downside (see Annex III and Selected Issues Paper II)

### Domestic risks
- Reputational and financial integrity risks:
  - Failure to continue progress in strengthening tax transparency and AML/CFT could damage Panama’s reputation, potentially prompting reduced external funding, reduced access to international financial services, and higher financing costs.
  - Increased scrutiny of companies registered in Panama or in the transparency and efficiency of public investment could lead to a re-evaluation of Panama’s role as an international financial and business center.
- Real estate and leverage risks:
  - Oversupply in segments of the property market could trigger a correction in prices.
  - Combined with elevated household and corporate leverage and rising interest rates, a property correction could trigger commensurate effects on financial stability and the real economy.
- Financial stability transmission:
  - Pressures on CBRs could adversely affect Panama’s international financial center.

### External risks
- Global growth and trade:
  - Weaker-than-expected global growth and a retreat from cross-border integration, particularly from trade, could lead to a slowdown in Canal activity, dampening Panama’s growth and government revenue.
  - Upside risk: a stronger-than-anticipated recovery in the United States or Latin America could boost Panama.
- U.S. monetary and tax policy:
  - A faster-than-expected tightening of U.S. monetary policy and continued appreciation of the U.S. dollar would put appreciation pressure on Panama’s REER and erode external competitiveness.
  - Possible changes to U.S. corporate tax rules could reduce FDI into Panama both directly from the U.S. and from other countries.
  - A rise in global interest rates would put upward pressure on Panamanian interest rates and contribute to the turning of the credit cycle.

### Authorities’ views on risks and outlook
- The authorities broadly share staff’s views on the outlook and risks but are more optimistic about growth prospects for 2017 and over the medium term.
  - Their optimism is based on a stronger projection for activity related to the expanded Canal, positive spillovers into transportation and logistics sectors, and an expected stronger recovery of the Latin American region.
- They broadly agreed with staff’s risk assessment, emphasizing key risks stem from the uncertain external policy environment and possible implications for global trade.
- They agreed with staff’s assessment of external stability and of public debt sustainability.

### Panama’s growth prospects: determinants and sectoral perspectives (Box 3)
- Structural strengths and policy priorities:
  - Panama’s success founded on strategic geographical position transforming it into a transportation hub and regional business center.
  - Important reforms to further cement competitiveness: improving the quality of education, strengthening governance, and reducing bureaucracy.
- Investment and growth projections:
  - Investment projected to remain a key driver of growth, though at a more sustainable pace.
  - Gross capital formation, which reached about 47 percent of GDP in 2016, is projected to gradually decline to about 42 percent of GDP.
  - Capital’s average contribution to growth will be about 1 percentage point lower than over the period 2008-2015, underpinning a revision of medium-term growth from about 6 percent (2016 Article IV consultation) to about 5.5 percent.
- Sector opportunities:
  - Logistics and tourism hold particular promise to build on Panama’s comparative advantages.
  - Tocumen airport: only about 10 percent of travelers transiting through the airport visit Panama; capturing a small share of transiting passengers could boost growth.
  - The expanded Canal could support development of ports, logistics, and the cruise segment, but risks cannibalization if larger vessels transit directly between source and destination.
  - Diversifying tourism beyond Panama City toward beach and eco-tourism can support inclusive growth and reduce higher rural poverty rates.

### Strengthening tax transparency and financial integrity (Policy Discussion A)
- Immediate reforms and commitments:
  - Panama committed to implement automatic exchange of tax information (AEOI) by 2018, ratified the OECD’s Multilateral Convention on Tax Matters, and an agreement with the U.S. to implement FATCA.
  - The National Assembly adopted legislation to establish legal basis for AEOI, enhance revenue administration powers, and oblige all companies and foundations registered in Panama to keep accounting records.
  - Implementing legislation expected to be finalized in the first half of 2017.
- Assessment and compliance priorities:
  - Panama must obtain at least a “partially compliant” rating in the Global Forum’s fast-track assessment in mid-2017, following a “non-compliant” rating covering the period until June 2015.
  - Critical to assessment: availability of ownership and identity information, reliable accounting records for all relevant entities, and an effective mechanism for information exchange.
  - Strengthening revenue administration’s human, procedural, and ICT capacities is important.
- AML/CFT:
  - Legislative reforms in 2015 strengthened AML/CFT framework but gaps remain, most notably to make tax crimes a predicate offence to money laundering.
  - The National Commission finalized the national risk assessment in January 2017; the national AML/CFT strategy expected to be finalized and endorsed by mid-2017.
  - In May 2017, Panama will be assessed on effective implementation of the 2012 FATF standard by GAFILAT.
  - Demonstrating effective implementation of the 2015 legal framework remains a challenge given its recent adoption.
- Authorities’ view:
  - Authorities reiterated full commitment to tax transparency and financial integrity and confidence in completing Global Forum and GAFILAT assessments.
  - They highlighted investments in capacity building, new ICT solutions, and priority to preserve Panama’s position as a regional financial center and to protect banks’ CBRs.

### Supporting sustainability with an enhanced fiscal framework (Policy Discussion B)
- Fiscal stance and rule:
  - The ongoing consolidation path consistent with the fiscal rule is broadly appropriate.
  - Fiscal policy turned slightly pro-cyclical in the last two years, but the mildly contractionary stance demonstrates commitment to fiscal discipline.
  - The authorities refrained from fully using the fiscal space created by the 2012 modification to the rule.
- Fiscal risks and contingent liabilities:
  - The defined-benefit part of the public pension system is projected to deplete its reserves by 2027 and start generating expenditure pressures thereafter.
  - Unfunded pension liabilities need parametric reform to avoid crowding out other public spending.
  - Turnkey contracts separate timing of construction, approval of associated obligation, and registration as expenditure; publishing information on different project stages would allow more accurate assessment of fiscal policy’s impact.
  - Including all accrued liabilities for completed project phases in debt figures and providing information on the unexecuted part of turnkey contracts would improve transparency and risk monitoring.
  - A comprehensive assessment of all contingent liabilities of the consolidated public sector is needed to ensure SFRL debt target results in adequate buffers.
- Fiscal council proposal:
  - Authorities preparing draft legislation to introduce a fiscal council to publicly assess and monitor fiscal assumptions, plans and performance, including implementation of the fiscal rule.
  - Ensuring legal and operational independence and adequate resources are essential preconditions.
- Revenue mobilization:
  - Continued progress in strengthening tax administration is essential to finance strategic public investment.
  - Tax administration reforms helped increase revenues; VAT collection increased by 17.5 percent.
  - Panama’s tax-to-GDP ratio, at about 10 percent, remains among the lowest in the region.
  - Measures proposed: introduce electronic invoicing and modernize IT systems; review and streamline tax incentives and exemptions starting with publishing a list of estimated foregone revenues.
- Customs administration:
  - Customs revenue collection declined significantly, beyond subdued trade activity.
  - Institutional weaknesses remain: need to reform control processes, enhance human resources, limit discretionary powers, improve data collection and management, and advance trade facilitation.
  - Introducing performance indicators and monitoring will support reform.
- Authorities’ view:
  - Authorities committed to continuing fiscal discipline in line with fiscal rule targets, improving monitoring of fiscal risks, and preparing their first report on fiscal risks.
  - They expect draft legislation for the fiscal council to be considered by the National Assembly in mid-2017.
  - Electronic invoicing pilot version scheduled to be unveiled by end-2017.

### Strengthening financial sector oversight and crisis management (Policy Discussion C)
- Financial system size and composition:
  - Financial sector assets are sizeable at 238 percent of GDP.
  - Banks represent about 90 percent of system assets, with offshore banks holding about 16 percent of bank assets.
  - Offshore banks are prohibited from conducting domestic banking operations but do participate in the interbank market.
  - Onshore banks’ activities are closely intertwined with insurance and broker-dealer subsidiaries.
- Credit trends and vulnerabilities:
  - Credit to the domestic private sector is high compared to regional standards and Panama’s level of economic development.
  - Rapid increase of debt occurred in an environment of very low interest rates; an anticipated increase in global interest rates would put pressure on Panamanian interest rates because borrowing is primarily on a variable rate basis.
  - Credit risks would rise with a domestic slowdown or a correction in property prices; anecdotal evidence suggests oversupply in both residential and commercial real estate.
  - Non-performing loans remain low and well provisioned but were on an upward trend over 2016, warranting careful monitoring.
- Banking sector pressures and consolidation:
  - The banking system includes 55 banks serving the domestic economy, including two state-owned banks.
  - Banks are well capitalized, but capital adequacy is expected to decline as the ongoing transition to Basel III continues.
  - Liquidity remains above regulatory norms but below Basel III requirements.
  - Profitability is on a downward trend; banks have not fully passed on rising funding and compliance costs to customers.
  - Cost pressures from anticipated global rate rises and compliance with international standards are expected to contribute to consolidation; anecdotal evidence suggests some smaller banks are facing challenges.
- Financial soundness indicator highlights (as presented):
  - Return on Assets, Return on Equity, Liquid Assets to Total Assets Ratio, Regulatory Capital to Risk-Weighted Assets, Capital to Assets Ratio, Nonperforming Loans (NPLs) to Total Loans Ratio, Provisions to Nonperforming Loans Ratio are compared across regional peers in the report.

*Source: IMF staff summary and analysis as presented in the provided content unit.*

### 24.      Prudential regulations are being strengthened. Banks’ capital regulations have been

### 24.      Prudential regulations are being strengthened. Banks’ capital regulations have been

### Prudential regulations and Basel III alignment
- Banks’ capital regulations have been largely aligned with Basel III.
- Introduction of capital regulations for banking groups to strengthen supervision of financial conglomerates.
- New regulations anticipated in the second half of 2017 to complete alignment with Basel III, including:
  - introduction of the liquidity coverage ratio, with implementation expected in 2018;
  - capital charges for market and operational risk.
- The expected introduction of the liquidity coverage ratio is highlighted as an important step to ensure resilience of the system.
- Risk-based supervision of non-bank financial institutions remains at a nascent stage and enhanced capacity will be needed to facilitate the transition.

### Coordination of systemic financial stability monitoring
- Coordination across financial supervisors should be strengthened.
- The Financial Coordination Council (FCC) has taken steps to:
  - enhance oversight of financial conglomerates;
  - deepen information exchange across supervisors.
- Memoranda of Understanding (MOUs) are being finalized and joint inspections of financial conglomerates were to take place in 2017 for the first time.
- Over the medium term, moving toward a more centralized supervisory structure would facilitate systemic risk oversight given the importance of financial conglomerates.

### Strengthening systemic oversight: monitoring, stress tests, and data gaps
- Under SBP leadership, progress includes:
  - more intensified monitoring of credit risks with early warning indicators;
  - stress tests considering macroeconomic and interest rate shocks (baseline, moderate stress and severe stress scenarios) through impacts on nonperforming loans and bank capital adequacy;
  - a new financial stability index.
- Stress tests conclude that banks’ capital, on average, would remain adequate even in the event of severe macroeconomic and interest rate shocks.
- Data gaps continue to hinder adequate monitoring of sectoral risks, particularly related to households.
  - Efforts underway to develop new data on household income and indebtedness as well as property prices.
  - Recommendation to expand data development to the corporate sector.
- SBP has begun to monitor structural risks by:
  - developing a methodology to identify systemically important banks based on the Basel Committee’s methodology;
  - planning to begin network analysis of banks’ interconnections.

### Macroprudential framework and recommended tools
- A framework for macroprudential policy should be established.
- Macroprudential policy can provide policy flexibility to address macro-financial risks.
- Recommendations include:
  - consider additional capital buffers, particularly for systemically important financial institutions, with calibration taking into consideration existing dynamic provisioning requirements;
  - prioritize development of macroprudential policy tools targeted at the household sector (where macro-financial risks appear concentrated).
- Possible sectoral tools to design (dependent on improved data) include:
  - limits on loan-to-value ratios;
  - maximum debt-to-income ratios;
  - debt-service-to-income ratios.
- Staff encouraged SBP to develop regulatory and supervisory tools in tandem with enhanced monitoring of systemic risks.

### Crisis management and financial safety net
- Panama lacks a central bank and therefore lacks a lender of last resort to provide liquidity in a systemic shock.
- Banco Nacional de Panama introduced a $500 million repo facility for local banks in 2016.
  - The facility is welcome but its coverage would be inadequate for systemic shocks.
  - Recommendation to establish a liquidity facility with adequate resources to address systemic shocks as a complement.
- Deposit insurance remains an important gap in the financial safety net.
- Ongoing bank resolutions have been prolonged due to SBP’s inadequate resolution powers; need to upgrade the framework to provide SBP with sufficient resolution powers.
- Recommendation that a crisis management plan be elaborated to coordinate supervisory agencies’ response; FCC should be tasked with preparing such a plan, including hypothetical simulation exercises.
- Two bank resolutions are ongoing representing a small share of banking system assets; the resolutions are related to compliance issues and have been orderly.

### Authorities’ views
- Authorities agreed on the importance of continued strengthening of financial sector oversight in the context of Panama’s regional financial center.
- Noted expanded coordination and cooperation across supervisors domestically (FCC) and across borders (supervisory colleges).
- Indicated consideration of moving toward a more consolidated structure of supervision to facilitate supervision of financial conglomerates.
- Agreed on importance of strengthening oversight of systemic risk and noted improved data as a precursor to developing macroprudential framework and tools.
- Indicated crisis management framework is unlikely to be updated in the near-term given moral hazard and funding concerns regarding a liquidity facility and deposit insurance.
- Authorities maintain a strong focus on early detection of risks and intervention to maintain financial stability.

### Staff appraisal: priorities and recommendations
- Steps to fully align prudential regulations with Basel III are welcome and will enhance resiliency of the financial system.
- Resiliency will also be strengthened by:
  - deepening coordination of microprudential supervision across supervisors to include monitoring of systemic risks;
  - developing macroprudential policy tools targeted at financial conglomerates and household debt to manage macrofinancial risks;
  - strengthening Panama’s crisis management framework by:
    - establishing a temporary liquidity facility for banks to address systemic shocks;
    - improving SBP’s bank resolution powers;
    - introducing deposit insurance;
    - developing a framework to coordinate the response of supervisory agencies to financial stability risks.

*IMF staff report excerpt.*

### 38.      Staff propose that the next Article IV consultation take place on the standard 12-

### 38.      Staff propose that the next Article IV consultation take place on the standard 12-month cycle.

### Socio-Economic Indicators
- Per capita income: Panama among highest in Latin America (PPP GDP per capita, 2016 shown relative to CHL, PAN, URY, MEX, CRI, DOM, BRA, COL, PER, SLV, GTM, NIC, HND).
- Income inequality: GINI Index presented for 2010 and 2014 series; figures show Panama with higher income inequality than regional peers (2014 series ordering includes URY, SLV, PER, NIC, DOM, MEX, CRI, GTM, CHL, HND, PAN, BRA, COL).
- Educational attainment (15+ population, 2010): Panama shows higher educational attainment than other CAPDR countries (no numeric breakdown for Panama in text beyond chart).
- Quality of education: Below LAC average, comparable to other CAPDR countries (chart-based statement).
- Life expectancy: 77.6 years (2014).
- Infant mortality: Comparable to regional peers (chart-based statement).
- Unemployment: Total unemployment 5.5 (August, 2016).

### Real Sector Developments (2012–2016)
- Real GDP annual growth rates (chart): economic activity continued to moderate; recent growth mainly driven by construction, commerce, and services; weak performance of the Canal and the CFZ noted.
- Contribution to GDP growth by demand component (chart): private investment showed robust contribution; public investment and inventories/net exports varied across years.
- High-frequency indicators (index 2012Q1=100): trade volume CFZ, new car sales, value of construction, toll revenue ACP tracked (no single numeric summary beyond chart).
- Inflation: remained subdued amid low fuel prices and a strong US dollar (Core CPI, Transport, Food and beverages and Headline Inflation shown in charts).
- Unit labor costs: real wage growth outpaced productivity, leading to higher unit labor costs (ULC index series, index 2012=100).

### Fiscal Sector Developments (2012–2016)
- NFPS primary balance and NFPS balance: charts show fiscal deficit narrowing through 2016.
- Expenditure composition (percent of GDP): Interest, current primary expenditure, capital expenditure shown in charts.
- Debt: NFPS Net Debt and NFPS Debt (percent of GDP) stabilized below ceiling set in the fiscal rule (chart).
- Revenues: tax revenues registered a significant rebound in 2016; import taxes continued to decline (chart and text).
- Public gross fixed capital formation (percent of GDP): public investment remains among the highest in the region (chart).
- Tax revenues (percent of GDP): series plotted with Tax revenues (ex. import tax) and Import tax (RHS).

### Macrofinancial Developments
- Credit to the private sector: high compared to regional standards and Panama’s level of economic development (2016 percent of GDP chart comparing Panama, CAPDR, LA5).
- Credit to households: on an upward trend; mortgages and consumer credit expanding rapidly, with recent moderation signs (charts).
- Credit to businesses: expanded less rapidly, mainly due to contraction in credit to the CFZ (chart: Credit to Commerce contribution).
- Interest rates: have ticked up and could face additional upward pressure from global interest rates (chart: Interest Rates; 1–5 years duration).
- Private sector credit (12-month percent change, Table 5): 14.7 (2012), 13.3 (2013), 10.2 (2014), 11.6 (2015), 8.3 (2016), 6.6 (2017 projection), 6.9 (2018 projection).

### Banking Sector Soundness
- Nonperforming loans (percent of total loans): remain low but rising since 2014; chart shows National banking system and breakdown by bank type.
- Provisioning: has fallen but remains adequate (provisioning charts show levels by bank type).
- Profitability: moderate downward trend in return on assets; net interest margins under downward pressure (charts).
- Capital adequacy: remains in excess of regulatory minimum but has fallen with strong credit growth (Capital Adequacy Ratio chart; ratio of capital to risk-weighted assets series in Table 7).
- Bank liquidity: remained stable (liquidity ratio chart).
- Financial soundness indicators (Table 7, selected):
  - Nonperforming loans as percent of total loans (banking system): 1.3 (Dec.2012), 1.1 (Dec.2013), 1.3 (Dec.2014), 1.1 (Dec.2015), 1.3 (Dec.2016).
  - Ratio of provisions to nonperforming loans (banking system): 178.2 (Mar.2012), 171.2 (June 2012), 90.9 (Sept.2012), 97.5 (Dec.2012), and series through Dec.2016 including 80.6.
  - Net income on average assets (banking system): 1.7 (Mar.2012), 1.4 (June 2012), 1.5 (Sept.2012), 1.5 (Dec.2012), and series to Dec.2016 showing 1.3.
  - Ratio of liquid assets to total assets (banking system): 16.9 (Mar.2012), 17.7 (June 2012), 19.5 (Sept.2012), 19.8 (Dec.2012), and series to Dec.2016 showing 16.7.
  - Ratio of capital to risk-weighted assets (banking system): ranges from 15.7 to 14.0 across periods in Table 7, with Dec.2016 at 15.0.

### Selected Economic and Social Indicators (Table 1)
- Population (millions, 2015): 3.9
- Poverty line (percent, 2015): 23.0
- Population growth rate (percent, 2015): 1.6
- Adult literacy rate (percent, 2010): 94.0
- Life expectancy at birth (years, 2014): 77.6
- GDP per capita (USD, 2015): 13,268.1
- Total unemployment (August, 2016): 5.5
- IMF Quota (SDR, million): 376.8

### Key Macro Projections and Levels (selected entries from Tables 1–5)
- Real GDP growth (percent): 9.2 (2012), 6.6 (2013), 6.1 (2014), 5.8 (2015), 4.9 (2016), projections 5.1 (2017), 5.6 (2018), 5.8 (2019), 5.6 (2020), 5.5 (2021), 5.5 (2022).
- CPI (average): 5.7 (2012), 4.0 (2013), 2.6 (2014), 0.1 (2015), 0.7 (2016), projections 2.0 (2017), 2.3 (2018), 2.5 (2019), 2.4 (2020), 2.3 (2021), 2.3 (2022).
- NFPS overall balance, including ACP (percent of GDP): -3.0 (2012), -4.0 (2013), -4.7 (2014), -4.3 (2015), -3.0 (2016), projections -2.0 (2017), -1.4 (2018), -1.2 (2019), -1.1 (2020), -1.2 (2021), -0.8 (2022).
- NFPS debt (percent of GDP): 35.7 (2012), 35.0 (2013), 37.1 (2014), 38.8 (2015), 38.8 (2016), projections 38.0 (2017), 36.5 (2018), 35.3 (2019), 34.0 (2020), 32.8 (2021), 31.5 (2022).
- Current account (percent of GDP): -10.5 (2012), -9.8 (2013), -13.7 (2014), -7.3 (2015), -5.6 (2016), projections -6.2 (2017), -5.8 (2018), -3.6 (2019), -3.2 (2020), -3.2 (2021), -3.0 (2022).

### Summary Operations of the Non-Financial Public Sector (Table 2, selected)
- Revenues (percent of GDP): 22.4 (2012), 22.2 (2013), 20.4 (2014), 20.4 (2015), 20.5 (2016), projection 21.3 (2017).
- Expenditure (percent of GDP): 23.9 (2012), 24.4 (2013), 23.6 (2014), 22.8 (2015), 22.7 (2016), projection 23.0 (2017).
- Overall balance, excluding ACP (percent of GDP): -1.4 (2012), -2.3 (2013), -3.3 (2014), -2.3 (2015), -2.2 (2016), projection -1.7 (2017).
- Panama Canal Authority (ACP) overall balance (percent of GDP): -1.5 (2012), -1.8 (2013), -1.4 (2014), -2.1 (2015), -0.9 (2016), projection -0.3 (2017).
- Primary balance (excluding ACP): -0.1 (2012), -0.5 (2013), -1.6 (2014), -0.7 (2015), -0.6 (2016), projection -0.3 (2017).

### Summary Operations of the Central Government (Table 3, selected)
- Revenues and grants (percent of GDP): 16.0 (2012), 15.2 (2013), 13.8 (2014), 13.6 (2015), 13.8 (2016), projection 14.6 (2017).
- Total expenditure (percent of GDP): 19.4 (2012), 19.2 (2013), 18.0 (2014), 17.7 (2015), 17.3 (2016), projection 17.1 (2017).
- Overall balance (percent of GDP): -3.4 (2012), -4.0 (2013), -4.2 (2014), -4.2 (2015), -3.5 (2016), projection -2.5 (2017).
- Primary balance (percent of GDP): -1.6 (2012), -2.2 (2013), -2.5 (2014), -2.4 (2015), -1.8 (2016), projection -1.0 (2017).

### Balance of Payments (Table 4, selected, in millions of U.S. dollars unless specified)
- Current account: -4,177 (2012), -4,401 (2013), -6,730 (2014), -3,798 (2015), -3,098 (2016), projections -3,649 (2017), -3,711 (2018), -2,508 (2019), -2,417 (2020), -2,595 (2021), -2,632 (2022).
- Merchandise trade balance excluding Colón Free Zone: -10,262 (2012), -10,533 (2013), -11,641 (2014), -9,877 (2015), -9,197 (2016), projections -9,884 (2017), -10,362 (2018), -10,378 (2019), -11,140 (2020), -12,207 (2021), -13,288 (2022).
- Services, net: 7,872 (2012), 7,783 (2013), 7,789 (2014), 10,036 (2015), 10,311 (2016), projections 11,002 (2017), 11,894 (2018), 12,891 (2019), 13,937 (2020), 15,032 (2021), 16,238 (2022).
- Direct investment (net): 3,485 (2012), 3,612 (2013), 4,130 (2014), 3,966 (2015), 5,060 (2016), projections 5,275 (2017), 5,507 (2018), 5,267 (2019), 5,562 (2020), 5,922 (2021), 6,123 (2022).
- Overall balance (in millions): 364 (2012), 0 (2013), 21,222 (2014), -786 (2015), 0 (2016), projections 93 (2017), 133 (2018), 654 (2019), 134 (2020), 364 (2021), 604 (2022).

### External Vulnerability Indicators (Table 5, selected)
- Gross external debt (percent of GDP): 136.8 (2012), 132.0 (2013), 136.4 (2014), 141.9 (2015), 131.8 (2016), projections 126.5 (2017), 120.6 (2018), 114.4 (2019), 106.9 (2020), 101.2 (2021), 96.9 (2022).
- Gross international reserves at end of period (in millions of U.S. dollars): 2,412 (2012), 3,145 (2013), 3,549 (2014), 3,694 (2015), 4,341 (2016), projection 4,654 (2017), 5,031 (2018).
- Current account balance (percent of GDP): -10.5 (2012), -9.8 (2013), -13.7 (2014), -7.3 (2015), -5.6 (2016), projection -6.2 (2017), -5.8 (2018).

### Summary Accounts of the Banking System (Table 6, selected)
- Net foreign assets (in millions): 7,269 (2011), 5,946 (2012), 5,928 (2013), 6,074 (2014), 5,021 (2015), 3,974 (2016).
- Credit to the private sector (in millions): 31,667 (2011), 36,315 (2012), 41,144 (2013), 45,325 (2014), 50,584 (2015), 54,781 (2016).
- Domestic liabilities to private sector (in millions): 27,087 (2011), 30,176 (2012), 32,352 (2013), 35,005 (2014), 36,937 (2015), 38,468 (2016).
- Broad Money (percent change): 13.7 (2012), 9.5 (2013), 8.0 (2014), 10.7 (2015), 8.3 (2016), 4.9 (2016 annual percent in Table 6 context).

*Source: https://www.imf.org/-/media/files/publications/cr/2017/cr-17105.pdf*

### Annex I. External Stability Assessment

### Annex I. External Stability Assessment

### External position and current account developments
- Panama’s external position remains moderately weaker than suggested by fundamentals, but is on track to return to its norm over the medium-term.
- The current account deficit declined to 5.6 percent of GDP in 2016, down from a recent peak of 13.7 percent in 2014.
- The decline in the current account deficit reflects:
  - a decline in global commodity prices;
  - a broader decline in imports as several large-scale construction projects wound down (most importantly the expansion of the Panama Canal was completed in 2016);
  - a widespread decline across all goods exports, with goods exports dropping to 4.3 percent of GDP in 2016 after averaging almost 9 percent of GDP over the decade prior.
- Service exports remained stable at 26.5 percent of GDP in 2016, consistent with the average level over the prior decade.
- The Colon Free Zone (CFZ) loss of competitiveness contributed about 1.5 percentage points to the decline in goods exports; CFZ exports have been affected by challenges in main export markets (e.g. Venezuela) and Panama’s trade dispute with Colombia.

### Assessment versus fundamentals (EBA-lite and ES approaches)
- Since the mid-2000s, Panama’s current account deficit has been consistently larger than the value explained by fundamentals and desirable policies according to the EBA-lite methodology; the gap is driven by the residual rather than deviations in policy from desired policy.
- The widening of the deficit was primarily driven by temporarily high investment, mainly linked to the Panama Canal expansion; both the EBA and ES methodologies fail to fully capture the impact of temporarily high investment.
- With the completion of the expansion project in 2016 and the winding down of related imports, the current account gap now exceeds its norm by only 1.7 percent of GDP.
- Decomposition (EBA-lite illustrative calculations):
  - (a) Actual current account = -5.3%
  - (e) Fitted current account = -2.7%
  - (b) Current account norm = (e) - (g) = -3.9%
  - (f) Residual (a) - (e) = -2.7%
  - (c) Current account gap = (a) - (b) = -1.4%
  - (g) Policy gap = 1.2% (positive policy gap driven primarily by a more-expansionary-than-desirable fiscal policy of the rest of the world)
  - (d) Real exchange rate elasticity = -20.0%
  - Real exchange rate gap (ES Approach) = 7.1% (computed as (c)/(d))
  - Real exchange rate misalignment judged in the range of -11.8 percent to 7.1 percent based on various EBA-lite approaches.

### Financing structure and FDI
- The current account deficit has been predominately financed by FDI inflows; FDI remained robust in 2016 at 9.2 percent of GDP.
- Since 2014, FDI has been primarily comprised of reinvested earnings of large multinational corporations operating in Panama; the stability of these inflows depends on the continued profitability of these firms.
- About a quarter of FDI originates in the United States; proposed changes to U.S. corporate tax rules may present a risk if they encourage profit repatriation or lower FDI from other countries.
- Portfolio inflows typically finance a smaller share of the deficit and have remained broadly stable over time.

### External debt, IIP, and sustainability
- External debt liabilities reached an estimated 135 percent of GDP in 2015, down from 332 percent in 1995.
- FDI now comprises over 50 percent of Panama’s external liabilities (up from about 11 percent in 1995), mitigating external vulnerabilities.
- The external debt profile presents no sustainability concerns: the external debt-to-GDP ratio is set to decline into the medium-term, with a low share of short-term debt.
- Panama’s net international investment position (IIP) was estimated at 71.8 percent of GDP in 2016.
  - Stabilizing the IIP at the 2016 level implies an IIP-stabilizing current account deficit of 5.4 percent of GDP.
  - Reducing Panama’s net IIP to 65 percent of GDP (the average since 1995) would imply an IIP-stabilizing current account deficit of 4.9 percent of GDP, reducing the estimated under-valuation to about 9 percent.
- Panama’s external sustainability is further mitigated by the relative resilience of its exports to recent appreciation, though exports declined as a share of GDP in 2016.

### Exchange rate developments and competitiveness
- Panama is fully dollarized; nominal and real effective exchange rates depreciated over much of 2016 before renewed appreciation pressure in the last quarter.
- On balance, Panama’s nominal effective exchange rate appreciated by 1 percent from end-2015 to end-2016, while the real effective exchange rate appreciated by 0.8 percent.
- Excluding Venezuela, Panama’s nominal effective exchange rate appreciated by 5.8 percent, while the real effective exchange rate depreciated by 7 percent (note: this exclusion caveat reported in the source).
- Pressures for nominal effective appreciation could persist into 2017 if relatively stronger U.S. growth and higher U.S. interest rates maintain U.S. dollar strength.
- Limitations in REER measurement:
  - Panama’s REER is calculated using bilateral goods trade weights; since Panama exports very little goods (services account for almost 90 percent of exports outside the CFZ), the REER may not accurately capture competitiveness in services if service export destinations differ from goods destinations.
- Competitiveness indicators and sectoral observations:
  - Panama’s goods exports have lost competitiveness, but services exports (notably tourism and transportation services) have remained competitive.
  - Tourism services account for about 30 percent of service exports and have gained market share globally and relative to LAC competitors; Panama’s market share relative to CAPDR competitors has stabilized more recently.
  - Transportation services account for over 20 percent of service exports, 2/3 of which is driven by the Panama Canal; the Canal expansion is expected to improve competitiveness in transportation services.
  - Panama has a competitive advantage in logistics relative to regional peers and has improved connectivity relative to major ports, though connectivity remains below the world’s largest global ports.

### Survey-based competitiveness rankings
- World Economic Forum’s 2016–17 Global Competitiveness Report:
  - Panama ranks 42nd globally and is the second most competitive economy in LAC after Chile.
  - Panama’s strengths include financial market development, the macroeconomic environment, infrastructure, and efficiency.
  - Weaknesses include education and training, labor market efficiency, and institutions.
- World Bank Doing Business 2017:
  - Panama performs comparatively well on access to credit, starting a business, and trading across borders.
  - Priorities identified to strengthen the business environment include strengthening tax discipline and insolvency regimes.

### Reserves, liquidity, and policy recommendations
- International reserves appear low by standard reserve adequacy metrics and the IMF’s risk-based metric for emerging markets.
- Net international reserves (as reported close to the net foreign assets of Banco Nacional de Panama) are below standard adequacy metrics, though the government has access to other U.S. dollar assets such as the sovereign wealth fund and deposits held in domestic banks; the speed at which these could be utilized in a systemic liquidity shortage is unclear.
- Reserve adequacy metrics (selected values reported):
  - Months of imports benchmark = 3 months; actual coverage 2016 = 2.9
  - Broad Money benchmark = 20%; actual coverage 2016 = 11.3
  - Short-term debt benchmark = 100 percent; actual coverage 2016 = 43.2
  - IMF reserve adequacy metric benchmark = 100–150 percent; actual coverage 2016 = 50.1
  - Gross external debt, billions of USD: 2016 = 56.8
  - Additional reserves needed to reach IMF reserve adequacy metric of 100 percent, billions of USD = 4.3
- Recommendations emphasized in the assessment:
  - Build policy buffers and lessen vulnerabilities given the absence of a lender of last resort.
  - Establish a systemic liquidity facility for banks.
  - Develop a contingency plan to coordinate the response to a large unexpected shock to the financial system.

*International Monetary Fund — Annex I. External Stability Assessment (Panama).*

### Annex II. Debt Sustainability Analysis (DSA)

### Annex II. Debt Sustainability Analysis (DSA)

### Overview and Baseline Findings
- Public debt is expected to decline from close to 39 percent of GDP in 2016 to about 32½ percent of GDP by 2022.
- Key drivers of the downward trajectory:
  - Favorable growth outlook.
  - Primary fiscal surpluses due to projected medium-term consolidation in line with the SFRL targets.
  - Favorable automatic debt dynamics driven by a negative interest rate/growth differential.
- Public gross financing needs remain manageable, albeit rising over the projection horizon due to an assumed gradual increase in the share of short-term debt.
- Contribution to the projected reduction in public debt-to-GDP ratio (total reduction of 6¼ percent of GDP):
  - Automatic debt dynamics (negative interest rate/growth differential): about 5 percent of GDP.
  - Fiscal consolidation (projected series of primary surpluses): an additional 1.1 percent of GDP.
- Overall gross external debt (public and private) is projected to continue to decline over the medium-term, aided by a projected decline in the current account deficit and favorable automatic debt dynamics.

### Macroeconomic Assumptions
- Real GDP growth:
  - 2016: 4.9 percent
  - 2017: 5.1 percent
  - Medium-term growth: about 5½ percent (projected)
- Inflation (GDP deflator change):
  - 2017: about 2 percent
  - Projected medium-term range: 2–2½ percent
- Primary fiscal balance (general trajectory under fiscal rule consolidation):
  - 2018: primary surplus of 0.1 percent of GDP
  - 2022: primary surplus of 0.4 percent of GDP
- Selected series from Public Sector DSA baseline table (nominal percent/GDP unless indicated):
  - Nominal gross public debt: 2016 = 38.8; 2017 = 38.8; 2018 = 38.4; 2019 = 37.1; 2020 = 35.9; 2021 = 34.7; 2022 = 32.6
  - Public gross financing needs (percent of GDP): 2016 = 3.6; 2017 = 2.9; 2018 = 3.2; 2019 = 3.3; 2020 = 5.0; 2021 = 6.8; 2022 = 7.0 (table shows up to 8.4/8.4? ensure preserve values as in table row)
  - Real GDP growth (in percent): 2016 = 4.9; 2017 = 5.1; 2018 = 5.6; 2019 = 5.8; 2020 = 5.6; 2021 = 5.5; 2022 = 5.5
  - Inflation (GDP deflator, in percent): 2016 = 0.9; 2017 = 2.0; 2018 = 2.3; 2019 = 2.5; 2020 = 2.4; 2021 = 2.3; 2022 = 2.3
  - Nominal GDP growth (in percent): 2016 = 5.9; 2017 = 7.2; 2018 = 8.1; 2019 = 8.4; 2020 = 8.2; 2021 = 7.9; 2022 = 7.9
  - Effective interest rate (in percent): 2016 = 5.1; 2017 = 4.6; 2018 = 4.8; 2019 = 5.0; 2020 = 5.7; 2021 = 5.8; 2022 = 5.9

### Baseline Contributions to Debt Dynamics (selected items)
- Change in gross public sector debt (cumulative 2017–2022): -6.2 percent of GDP.
- Identified debt-creating flows (cumulative 2017–2022): -6.0 percent of GDP.
- Primary deficit (annual path and cumulative):
  - 2017 = 0.6 (primary deficit in table shows 0.6 for 2017); projected to move to surpluses: 2018 = 0.3; 2019 = -0.1; 2020 = -0.2; 2021 = -0.3; 2022 = -0.4
  - Cumulative contribution from primary deficits to debt reduction: -1.1 percent of GDP
- Automatic debt dynamics (cumulative 2017–2022): -4.9 percent of GDP
  - Interest rate/growth differential (same series as automatic dynamics)
  - Of which: real interest rate cumulative contribution = 6.2 (table shows per-year numbers culminating in 6.2)
  - Of which: real GDP growth cumulative contribution = -11.2

### Alternative Scenarios and Their Outcomes
- Historical scenario:
  - Assumes higher real GDP growth and larger primary fiscal surpluses based on past performance.
  - Public debt-to-GDP ratio drops below 28 percent over the projection horizon.
- Constant primary balance scenario:
  - Assumes the fiscal consolidation mandated by the fiscal rule does not take place.
  - Public debt-to-GDP converges to 35½ percent over the projection horizon.
- In both alternative scenarios, public debt-to-GDP follows a strictly downward trajectory.
- External debt sustainability: medium-term external debt profile is resilient to one-quarter standard deviation shocks to real interest rate, economic growth, and current account balance; external debt profile remains on a downward path.

### Stress Tests (Box 1) — Design and Key Results
- Three additional stress tests examined:
  1. Financial contingent liability shock.
  2. Combined GDP growth and financial conditions shock.
  3. Contingent liabilities of SOEs shock.

- Financial contingent liability shock (description and impact):
  - Shock components:
    - Near-term increase in non-interest public expenditure equal to 10 percent of the banking system’s assets in 2018.
    - One-standard deviation shock to real GDP growth in 2018–2019.
    - Interest rate increase by 25 basis points for each percent of GDP deterioration in the primary fiscal balance.
  - Result:
    - Public debt rises to almost 50 percent of GDP in 2018–2019.
    - Debt follows a declining path thereafter, falling to 45.5 percent of GDP by 2022.
    - Gross financing needs stabilize as a percent of GDP following a significant increase in the year of the shock.
  - Selected scenario table entries (Financial Contingent Liability Shock):
    - Real GDP growth: 2017 = 5.1%; 2018 = 2.4%; 2019 = 2.6%; 2020 = 5.6%; 2021 = 5.5%; 2022 = 5.5%
    - Inflation (GDP deflator change): 2017 = 2.0%; 2018 = 1.5%; 2019 = 1.7%; 2020 = 2.4%; 2021 = 2.3%; 2022 = 2.3%
    - Non-interest revenue-to-GDP ratio: 2017 = 21.2%; 2018 = 21.0%; 2019 = 21.1%; 2020 = 21.1%; 2021 = 21.1%; 2022 = 21.0%
    - Non-interest expenditure-to-GDP ratio: 2017 = 21.5%; 2018 = 31.5%; 2019 = 20.9%; 2020 = 20.8%; 2021 = 20.8%; 2022 = 20.6%
    - Primary Balance: 2017 = -0.3%; 2018 = -10.5%; 2019 = 0.2%; 2020 = 0.3%; 2021 = 0.3%; 2022 = 0.4%
    - Interest rate shock (bpts) compared to baseline: 2018 = 2650 (table shows "0265000 0" — interpreted as spike during shock year)

- Combined real GDP growth and financial conditions shock:
  - Shock design:
    - Drop in GDP growth by 2 percentage points each year over 2018–2022.
    - Increase in the interest rate of 400 basis points compared to baseline.
  - Result:
    - Public debt follows a slightly higher trajectory, still trending downwards.
    - Debt drops to 37 percent of GDP over the medium term.
  - Selected scenario table entries (Combined Shock):
    - Real GDP growth: 2017 = 5.1; 2018 = 3.6; 2019 = 3.8; 2020 = 3.6; 2021 = 3.5; 2022 = 3.5
    - Inflation: 2017 = 2.0%; 2018 = 2.3%; 2019 = 2.5%; 2020 = 2.4%; 2021 = 2.3%; 2022 = 2.3%
    - Interest rate shock (bpts) compared to baseline: 2018–2022 = 400 each year

- Contingent liabilities of SOEs shock:
  - Shock design:
    - Government covers contingent liabilities of public companies excluded from the NFPS and possible contingent liabilities from a newly-established liquidity facility at BNP.
    - Increase in non-interest expenditure of about 4.6 percent of GDP in 2018.
    - Corresponding financing-cost increase of 25 basis points for each percent of GDP of additional primary deficit.
  - Result:
    - Debt rises but remains on a clear downward path to about 37 percent of GDP in 2022.
  - Selected scenario table entries (Contingent Liabilities of SOEs):
    - Real GDP growth: 2017 = 5.1%; 2018 = 5.6%; 2019 = 5.8%; 2020 = 5.6%; 2021 = 5.5%; 2022 = 5.5%
    - Non-interest expenditure-to-GDP ratio: 2018 = 25.4% (spike in 2018), then returns toward baseline

### Public Debt Composition and Market Indicators (selected)
- Public Sector debt composition (by maturity and currency) is projected in charts (figures):
  - By maturity (2006–2022): share of short-term vs. medium and long-term debt shown; assumption of gradual increase in share of short-term debt over projection horizon.
  - By currency (2006–2022): local currency-denominated vs. foreign currency-denominated composition shown.
- Market perception indicators (as of year-end data in table):
  - EMBIG (bp): 186 (table shows EMBIG (bp) 3/186)
  - 5Y CDS (bp): 127
  - Ratings: Moody's Baa2 / S&P's BBB / Fitch BBB

### External Debt Sustainability — Baseline and Projections (2011–2021)
- Baseline: External debt-to-GDP (selected years):
  - 2016 = 102.9
  - 2017 = 98.7
  - 2018 = 94.0
  - 2019 = 89.3
  - 2020 = 83.5
  - 2021 = 79.6
- Change in external debt (selected years):
  - 2016 = -1.4
  - 2017 = -4.2
  - 2018 = -4.7
  - 2019 = -4.7
  - 2020 = -5.8
  - 2021 = -3.8
- Identified external debt-creating flows (2011–2021 series shown), e.g. 2016 = 10.0; 2017 = 10.2; 2018 = 9.3; 2019 = 6.2; 2020 = 6.0; 2021 = 6.3
- Current account deficit, excluding interest payments (percent of GDP):
  - 2016 = 1.9
  - 2017 = 2.5
  - 2018 = 2.1
  - 2019 = -0.1
  - 2020 = -0.5
  - 2021 = -0.5
- Automatic debt dynamics (contribution, percent GDP):
  - 2016 = -1.1
  - 2017 = -1.2
  - 2018 = -1.4
  - 2019 = -1.3
  - 2020 = -0.9
  - 2021 = -0.6
- External debt-to-exports ratio (in percent):
  - 2016 = 325.7
  - 2017 = 314.2
  - 2018 = 293.8
  - 2019 = 268.8
  - 2020 = 248.0
  - 2021 = 238.3
- Gross external financing need (in percent of GDP):
  - 2016 = 32.5
  - 2017 = 30.2
  - 2018 = 36.4
  - 2019 = 31.5
  - 2020 = 33.3
  - 2021 = 23.8 (table also shows dollar amounts for gross financing need in billions)

### Stress-Test Bound Tests and Risk Assessment
- Bound tests and scenario shocks examined include:
  - Interest rate shock, growth shock, current account shock, combined shocks, and real depreciation.
- Heat-map risk assessment logic:
  - Cells highlighted green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline; yellow if exceeded under the specific shock but not baseline; red if benchmark is exceeded under baseline.
  - Gross financing needs benchmark of 15% is used to assess external financing vulnerability.
- Risk-assessment benchmark thresholds indicated in figures:
  - Bond spreads: 200 and 600 basis points.
  - External financing requirement: 5 and 15 percent of GDP.
  - Annual change in share of short-term debt: 0.5 and 1 percent.
  - Public debt held by non-residents: 15 and 45 percent.
  - Share of foreign-currency denominated debt: 20 and 60 percent.
- Market and vulnerability indicators (2016 values shown in figure panel):
  - EMBIG = 134 bp (figure shows 134 bp)
  - External financing requirement = 12 (percent of GDP)
  - Public debt held by non-residents = 33 percent
  - Annual change in short-term public debt = 0.5 (percent)
  - Public debt in foreign currency = 12 percent
  - These indicator levels are compared against the lower and upper benchmarks to assess vulnerabilities.

*Source: IMF staff.*

### Annex III. Implementation of Past IMF Policy Advice

### Annex III. Implementation of Past IMF Policy Advice

### Overview
- The authorities’ macroeconomic and financial policies over the last year have been broadly in line with past Fund advice.
- During the 2016 Article IV consultation, Directors:
  - stressed the importance of strengthening the AML/CFT framework in line with international standards and ensuring its effective implementation;
  - welcomed the authorities’ commitment to the automatic exchange of tax information, urging them to expand these agreements with other jurisdictions;
  - underlined the need to continue strengthening the transparency and accountability of the fiscal framework, broaden the tax base, develop appropriate incentives for tax compliance, and refrain from tax amnesties;
  - emphasized the need to develop contingency plans to address systemic shocks and to ensure larger liquidity buffers, including through an alignment of the liquidity regulation with the Basel III framework and the establishment of a temporary liquidity facility for banks;
  - encouraged the authorities to move forward with envisaged measures to improve education quality, reduce skills shortages, and strengthen productivity.

### Tax Transparency and Financial Integrity
- Actions taken:
  - Ratified OECD’s Multilateral Convention on Tax Matters, expanding Panama’s network of partner jurisdictions to over 100.
  - Ratified an agreement with the U.S. to implement FATCA.
  - Signed its first bilateral agreement for automatic exchange of tax information with Japan and initiated a few others.
  - National Assembly adopted key legislation to improve tax transparency.
  - Implementing measures to strengthen the tax administration’s human, procedural, and IT capacities for effective exchange of tax information.
  - Finalized the national AML/CFT risk assessment and is preparing a national AML/CFT strategy.
  - Ramped up supervisory capacity over AML/CFT risks and planned new ICT solutions to further strengthen capacity.
  - Begun to publish sanctions related to AML/CFT.

### Fiscal Policy
- Measures and outcomes:
  - Prepared draft legislation to introduce a fiscal council to strengthen transparency and accountability of the fiscal framework.
  - Improvements in tax administration, introduction of partial VAT withholding, and an upgraded tax filing system resulted in higher tax revenues.
  - Authorities refrained from tax amnesties.
  - Authorities have not reviewed tax incentives and exemptions to broaden the tax base.

### Financial Sector Reforms
- Regulatory alignment and oversight:
  - Prudential regulations further aligned with Basel III by introducing capital regulations for banking groups.
  - New regulations anticipated in 2017 to introduce capital charges for market and operational risk and to adopt the liquidity coverage ratio.
  - Improved coordination across financial supervisors for oversight of financial conglomerates, with joint supervision of financial conglomerates launched in 2017.
  - Strengthened systemic risk oversight under SBP’s leadership.
  - Efforts underway to address data gaps on household balance sheets and property prices.

### Inclusive Growth and Human Capital
- Education and skills initiatives:
  - Initiated actions to establish a new technical institute seen by the private and public sectors as an important step to addressing skills shortages in the labor market.
  - Policy actions remain focused on strengthening technical and language skills and improving programs for vocational education.

*Annex III. Implementation of Past IMF Policy Advice*

### Annex V. Implementation of 2011 FSAP Recommendations

### Annex V. Implementation of 2011 FSAP Recommendations

### Banking Oversight
- Finalize and implement regulations on operational and interest rate risks.
  - The SBP set qualitative requirements on operational management in December 2011 and in 2017 will finalize regulations for capital charges for these risks in line with Basel standards with full implementation planned for 2018.
- Enhance systemic risk monitoring and the capacity to implement macro-prudential policies.
  - A new credit risk regulation incorporating dynamic provisioning and accounting treatment of restructured loans was issued in May 2013.
  - The Financial Coordination Council (FCC), which consists of main financial supervisory agencies, was established in 2012. It mainly functions as an information exchange and coordinating body for the supervision of financial conglomerates, but over the medium-term plans to enhance its capacity for systemic risk oversight. The FCC could also play a coordinating role in macro-prudential policy.
  - The SBP publishes a Financial Stability Report on an annual basis, which includes an assessment of overall risks to financial stability, including those emanating from outside of the banking sector. The report includes the results of credit risk stress tests and of the stability of foreign deposits in the banking system. Planned upgrades include a more detailed analysis of household indebtedness and house price developments as existing data gaps are filled as well as network analysis to understand the risks presented by interconnections among banks and with other financial institutions, both within Panama and abroad.
  - The SBP has developed a methodology to identify systemically important banks for Panama adapted from the Basel Committee’s assessment methodology for systemically important banks and is considering the design of macro-prudential measures for these institutions.
- Develop capital adequacy and regulatory reporting standards for holding companies.
  - Regulation establishing a minimum capital requirement for bank holding companies was issued in February 2015, while also aligning definition of capital with Basel III rules, with the exception of the capital conservation buffer. Credit risk weighting was also revised in February 2016, incorporating elements of Basel II.
  - Other supervisory requirements, including concentration limits, governance structure and financial reporting, have been set for banking groups as well.
- Develop concentration limits and risk management requirements for interbank deposits.
  - No plans to develop such requirements explicitly for interbank deposits, while there are general concentration limits for single counterparty.
- Enhance offsite supervision to develop a view on macroprudential and systemic risk trends.
  - Off-site supervision was improved in 2012 through requirement for banks to report monthly performance and early warning indicators to the SBP based on supervisory data.
- Regulate and effectively supervise cooperatives that provide credit and savings products.
  - No ongoing initiatives.

### Insurance Sector Oversight
- Approve draft Insurance Law with strengthened prudential requirements.
  - Law 12 (dated April 3, 2012) created the Superintendency of Insurance and includes solvency and liquidity requirements.
  - Law 65 (dated December 9, 2016) modifies the insurance premium tax to provide more financial resources for the Superintendency and enhance its autonomy from the central government.
- Strengthen disclosure of performance indicators and brokers’ commissions.
  - The Superintendency of Insurance publishes, on a monthly basis, performance indicators for each insurer and reinsurer and publishes an annual report on the insurance industry.
  - Published performance indicators include written premiums, claims, policies, solvency margin, delinquencies, and insurers’ technical results.

### Securities Market Oversight
- Strengthen the budgetary position, and the supervisory and enforcement capabilities of the supervisor (National Securities Commission).
  - Law 67 (dated 1 September 2011) upgraded the Commission to a Superintendency (SMV), strengthening its supervisory and enforcement capacity as well as its budgetary position.
  - Law 23 (dated April 27, 2015) strengthened SMV’s ability to exchange information with other supervisors (both within Panama and foreign supervisors).
  - Law 66 (dated December 9, 2016) introduced a new fee structure to strengthen and guarantee the autonomy and budgetary position of the SMV. Under the new fee structure, the SMV is expected to be fully self-financed.
  - In 2015, the Specialized Department for the Prevention of Illicit Activities, including AML/CFT issues, was established.
  - Fund TA is supporting the development and strengthening of risk-based supervision and oversight of the securities market.

### Payments and Securities Systems Oversight
- Create a comprehensive payments system law guaranteeing payment finality.
  - Law 66 (dated December 9, 2016) amends the Securities Market Law to introduce rules on Central Counterparties (CCPs) and Financial Market Infrastructures (FMIs). These entities have access to the clearing house operated by the Banco Nacional and could facilitate the clearing and settlement of transactions.
- Adopt an RTGS or Hybrid Payments System.
  - The SBP and the industry, including Banco Nacional, are currently investigating the possibility of introducing a real-time gross settlement system.

### Financial Safety Nets
- Conclude studies and introduce a bank liquidity facility.
  - A liquidity facility of US$500 million was created by Banco Nacional in 2016, but is a general repo facility versus a facility for emergency liquidity assistance. There is no consensus among stakeholders to develop a liquidity facility for systemic risks.
- Establish a deposit insurance scheme.
  - No initiatives so far.

### Capital Market Development
- Build a single yield curve across domestic and global bonds by dual listing and extending market making to global bonds.
  - Ongoing. Since 2011, the Ministry of Economy and Finance has published information about the yields of Panamanian government bonds of different maturities.
  - Development of a yield curve for corporate bonds is pending with a committee conducting a preparatory study with the intent to introduce regulatory reforms in support of the development of a yield curve for corporate bonds.
  - The authorities have also been making efforts to extend market making to global bonds.
- Review and restructure or close public development banks and guarantee funds.
  - No initiatives so far.

### Fund Relations (Selected items)
- Membership Status: Joined: March 14, 1946; Article VIII.
- General Resources Account:
  - Quota 376.80 SDR Million 100.00%Quota
  - Fund holdings of currency 322.40 SDR Million 85.56
  - Reserve Tranche Position 54.41 SDR Million 14.44
- SDR Department:
  - Net cumulative allocation 197.01 SDR Million 100.00
  - Holdings 128.22 SDR Million 65.09
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements:
  - Stand-By: Type Stand-By; Date of Expiration Jun 30, 2000; Arrangement Date Mar 29, 2002; Amount Approved (SDR Million) 64.00; Amount Drawn (SDR Million) 0.00
  - EFF: Type EFF; Date of Expiration Dec 10, 1997; Arrangement Date Jun 20, 2000; Amount Approved (SDR Million) 120.00; Amount Drawn (SDR Million) 40.00
  - Stand-By: Type Stand-By; Date of Expiration Nov 29, 1995; Arrangement Date Mar 31, 1997; Amount Approved (SDR Million) 84.30; Amount Drawn (SDR Million) 84.30
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2017 0.16; 2018 0.21; 2019 0.21; 2020 0.21
  - Total: 2017 0.16; 2018 0.21; 2019 0.21; 2020 0.21
- FSAP: A first-time FSAP was concluded in September 2011. It recommended building the capacity to monitor systemic risks and introduce a financial safety net, including a facility aimed at addressing temporary liquidity shortfalls and a limited deposit insurance fund.
- Technical Assistance: Panama is a large recipient of technical assistance (TA) directly through the Fund or CAPTAC-DR covering fiscal framework, tax administration, national accounts, external sector statistics (BPM6), bank resolution framework, macroprudential policy, risk-based supervision, and market risk assessment tools.

### Statistical Issues
- Assessment of Data Adequacy for Surveillance:
  - General: Data provided to the Fund has some shortcomings but is broadly adequate for surveillance. Weaknesses remain in national accounts, government finance, and balance of payment statistics.
  - Real Sector:
    - IMF national accounts TA mission (2010-11) noted slow progress in expanding coverage of financial activity and overestimation of the deflator used to calculate financial services output in volume terms.
    - Since 2011, progress made in compiling FISIM on a monthly basis following the 2008 SNA, broadening coverage of household output, employment, compensation of employees, and mixed income in informal activities for 2007-2012.
    - Quarterly GDP data and monthly economic activity index have benefited from the use of monthly VAT records, Denton Proportional method, and X13 ARIMA-SEATS software.
    - Rebasing of national accounts to 2007: rebased NA data from the production approach published for 2007-2016; NA data from expenditure and income approaches available for 2007-2015.
  - Government finance statistics:
    - Operational balance of the Panama Canal Authority (ACP) excluded from official definition of the nonfinancial public sector (NFPS) since September 2004; ACP information only available in its Annual Report on its website.
    - In 2011, three public enterprises excluded from NFPS accounts and public debt: Tocumen International Airport, ETESA, and ENA. Need to compile and disseminate information on these entities timely.
    - 2012 decree establishing the Savings Fund of Panama (Fondo de Ahorro de Panama, or FAP) mandated reporting of deferred payment schemes in budget documentation.
    - Authorities received STA and FAD TA for GFSM 2001 implementation and fiscal accounting reforms; launched ISTMO platform for centralized public sector financial information.
    - Panama reports limited fiscal data to STA.
  - Monetary and Financial Statistics:
    - Panama regularly reports monetary data for depository corporations using SRFs for IFS publication.
    - Participated in regional harmonization project supported by CAPTAC; work program to expand institutional coverage to other depository corporations and OFCs.
    - Panama reports Financial Soundness Indicators (FSIs) to STA quarterly with data beginning in 2005.
    - Data gaps prevent deeper analysis of systemic risks: authorities do not collect adequate data on real estate prices, loan write-offs, loan-to-value ratios, and leverage indicators for households and corporate.
  - Balance of payments:
    - Quarterly data available with a delay of about one quarter and subject to revisions.
    - Outward FDI and repatriation data are collected only from the financial private sector, implying potential overestimation of current account deficit and IIP due to lack of coverage of outward FDI of the nonfinancial private sector.
    - Official statistics may underestimate inward portfolio investment.
    - Authorities conducted CDIS and CPIS to improve external sector data; quarterly IIP compiled since 2002, annual since 1998.
    - Panama began publishing BOP and IIP data in the BPM6 format.
- Data Standards and Quality:
  - Panama has participated in the Fund’s GDDS since December 2000; metadata need updating.
  - A data ROSC was published in October 2006.
  - Following SDDS assessment missions in April 2011 and November 2013, the authorities have a work program aimed at meeting SDDS requirements.

*Source: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (Annex V. Implementation of 2011 FSAP Recommendations).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr-17105.pdf_