## 1panea2020001 ## Source details **Canonical URL:** [1panea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1panea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1panea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1panea2020001.pdf.json) --- ### Recent developments - Growth and activity - Real GDP grew by about 3 percent in the first three quarters of 2019 (y/y). - Cobre Panama launched full-scale commercial production and the economy is estimated to have grown at 3½ percent in 2019. - Economic slowdown began in mid-2018 due to a construction strike; output began to recover in the last quarter of 2019. - Unemployment increased to 7.1 percent in August 2019 (from 6.0 percent a year before). - Inflation and credit - Headline CPI inflation was persistently subzero for most of 2019. - Credit growth decelerated to 2.5 percent in November 2019 (y/y), the lowest level in a decade. - Lending rates remained relatively stable; deposit growth slowed and NPLs remained low and stable. - Fiscal and public debt - Fiscal deficit reached 3.1 percent of GDP in 2019. - Previously unrecorded arrears of over 2 percent of GDP (US$1½ billion) were uncovered and have been paid. - Staff revised the 2018 deficit upward to 3.2 percent of GDP (from 2 percent). - Government modified the SFRL in October 2019, widening the 2019 deficit ceiling from 2 to 3½ percent of GDP and foreseeing gradual reduction to 2¾ percent for 2020. - Gross debt of the Central Administration rose to 46.2 percent of GDP; NFPS gross debt reached 40.8 percent of GDP in 2019; NFPS net debt amounted to 28.0 percent. - External sector and migration - Current account deficit reported to have improved to 6½ percent of GDP in 2019; staff estimates indicate 6.6 percent of GDP in 2019 (from 8.2 percent in 2018). - FDI remained high at 8 percent of GDP in 2019 and continued to finance the current account deficit. - Preliminary estimates indicate Venezuelan migrants in Panama reached 130,000 in 2019 (about 3 percent of the population and ⅓ of total inward migration). ### Outlook and key projections - Growth and inflation - Growth is expected to recover to 4.8 percent in 2020. - Over the medium term, growth is expected to stabilize at 5 percent annually. - Inflation is expected to pick up to 1 percent y/y in 2020 and stabilize at 2 percent y/y in the medium term. - External and fiscal projections - Current account deficit projected to fall to 5 percent of GDP by 2023 (staff table shows -6.4 percent 2020; -6.2 percent 2021; -5.9 percent 2022; -5.3 percent 2023; -4.8 percent 2024–25). - NFPS deficit expected to converge to 2 percent of GDP by 2022 (staff projections: Overall balance 2020: -2.7; 2021: -2.5; 2022: -2.0; 2023–25: -2.0). - Selected medium-term indicators (as presented) - Real GDP growth (Est./Projections): 2016: 5.0; 2017: 5.6; 2018: 3.7; 2019: 3.5; 2020: 4.8; 2021–2025: 5.0. - CPI inflation (average): 2016: 0.7; 2017: 0.9; 2018: 0.8; 2019: -0.4; 2020: 0.5; 2021: 1.5; 2022–2025: 2.0. - Private credit growth: 2016: 8.4; 2017: 6.5; 2018: 4.5; 2019: 3.1; 2020: 5.4; 2021: 6.6; 2022–25: 7.1. - Public debt (gross, NFPS 1/): 2016: 34.8; 2017: 34.8; 2018: 36.8; 2019: 40.8; 2020: 41.5; 2021: 41.5; 2022: 40.7; 2023: 40.0; 2024: 39.4; 2025: 38.7. - Current account balance (In percent of GDP): 2016: -7.8; 2017: -5.9; 2018: -8.2; 2019: -6.6; 2020: -6.4; 2021: -6.2; 2022: -5.9; 2023: -5.3; 2024–25: -4.8. ### Balance of risks and vulnerabilities - Balance of risks tilted to the downside. - Main domestic risks: - Setbacks in exiting the FATF grey list and complying with SFRL deficit ceilings causing reputational damage and pressures on correspondent banking. - Continued oversupply in the property market risking price corrections and rising NPLs. - Social tensions that could disrupt economic activity and policy implementation. - Notable external risks: - Slowdown in Canal activity; weaker global growth; escalating trade tensions; spread of coronavirus; U.S. dollar appreciation eroding competitiveness; sharp tightening of global financial conditions; cyberattacks; climate-change related extreme weather events affecting Canal, agriculture and tourism. ### Fiscal policy: diagnostics and recommendations - Key facts - Revenue underperformance is both cyclical and structural; NFPS revenue fell by about 1½ percent of GDP in 2019 despite high Canal receipts. - Tax revenue shortfall was 1 percent of GDP in 2019; tax collections have fallen by about 3 percentage points of GDP over the last decade. - Non-tax revenues mainly come from the Canal and will decrease over time as a share of GDP. - Policy recommendations - Gradual fiscal consolidation mindful of weak growth; avoid abrupt tightening. - Strengthen tax and customs administrations: governance, human resources, limits on discretionary powers, reform control processes, improve data collection and management. - If administrative reforms are insufficient, revisit tax exemptions and tax policy to counteract tax base erosion. - Contain current expenditure growth, rebalance toward social spending (especially education), and review capital spending for effectiveness and quality. - Use PPP law to leverage private finance for public investment where appropriate. - Pension reforms: align contributions with expected payouts; mixed scheme reserves supplement contributions until 2035; undertake gradual reforms early. ### Strengthening the fiscal framework - Recommendations to enhance credibility - Demonstrate commitment to fiscal discipline after several modifications of the fiscal rule. - Consider adapting fiscal policy to reduce procyclicality (e.g., a “shadow” structural fiscal rule to build buffers). - Consider targeting an overall fiscal deficit of 1½ percent of GDP in 2023 and thereafter (rather than 2 percent) to accumulate buffers while observing the SFRL. - Appoint members of the fiscal council (Law approved October 2018; members not yet appointed at time of report). - Strengthen transparency and recording of fiscal accounts by migrating to accrual accounting, preventing accumulation of unrecorded arrears, monitoring contingent liabilities (including PPPs), and ensuring clear consequences for misuse of funds. ### Financial integrity and tax transparency (AML/CFT) - FATF and reforms - Panama returned to the FATF grey list in June 2019 for low effectiveness in AML/CFT and technical deficiencies. - FATF called for action in four areas: enhance AML/CFT risk assessment; enforce legal action and supervision of DNFBP; verify and update beneficial ownership information; demonstrate ability to prosecute money laundering involving foreign tax crimes and provide international cooperation. - Measures taken in 2019 - Criminalized tax evasion in January 2019; amended legal code in September 2019. - Created Superintendency of Non-financial Subjects; introduced criminal penalties for unlicensed money remitters; created a single registry for final beneficiaries of offshore entities; suspended 381,000 dormant entities. - Created working group with France on fiscal and financial transparency. - Policy priority - Urgent creation of a roadmap to undertake necessary reforms to exit FATF watchlist; failure risks severing correspondent banking relationships, drying up domestic liquidity and stifling growth. - Other assessments - OECD Global Forum upgraded Panama to “partially compliant” with global tax-transparency standard but noted remaining challenges. - European Union added Panama to its list of non-cooperative tax jurisdictions in February 2019. ### Financial system soundness and resilience - System-wide findings - Private credit remained elevated above 80 percent of GDP. - Onshore banking system resilient: capital above regulatory requirements, banks profitable, gross NPL ratio stabilized around 2 percent and well-provisioned. - Liquidity buffers could be strengthened: liquid assets cover only one third of short-term liabilities. - Authorities adopted Basel III-related liquidity rules in 2018; LCR phased-in by 2022. - Pockets of vulnerability - NPL concentration in construction, commerce and the Colon Free Zone (CFZ). - Oversupply in some property segments, especially high-end market; risk of sharp contraction triggering macrofinancial spillovers. - Credit to households is main driver of bank credit growth; monitor household indebtedness. - Cooperative financial sector small (~2 percent of system) but not well known. - Policy recommendations to bolster resilience - Adopt regulations on banking resolution, cybersecurity, and fintech. - Elaborate a crisis management plan and develop an emergency liquidity mechanism. - Introduce an emergency liquidity facility and limited deposit insurance scheme. - Promptly adopt a bank resolution framework and formalize crisis management plans. - Implement capital conservation buffers and capital surcharges for systemically-important banks; implement NSFR after quantitative impact study. - Expand macroprudential toolkit, e.g., limit household debt-service-to-income ratio. - Banking-sector indicators (selected exact figures, quarterly 2017–2019) - Total deposits-to-total loans ratio: 112.6, 112.8, 110.2, 110.5, 109.3, 107.1, 104.5, 106.3, 105.9, 106.4, 107.0. - Leverage ratio (%): 11.0, 11.3, 11.6, 11.4, 11.3, 11.5, 11.6, 11.3, 11.7, 12.0, 12.2. - ROA: 1.4, 1.5, 1.5, 1.5, 1.6, 1.6, 1.5, 1.5, 1.5, 1.5, 1.4. - ROE: 13.2, 13.6, 13.1, 13.5, 13.9, 13.7, 12.7, 12.8, 13.0, 12.4, 12.2. - NPL ratio: 1.5, 1.5, 1.7, 1.4, 1.7, 1.8, 1.9, 1.7, 1.8, 1.8, 1.9. ### Fintech, connectivity and cybersecurity - Panama advantages and policy focus - Close to submarine cable interconnections; access to internet bandwidth higher than most OECD countries; mobile phone usage 77 percent of adults. - Regulatory sandbox underway for fintech. - Staff encourages robust cybersecurity and fintech regulatory frameworks to mitigate risks and to position Panama as a regional fintech hub. ### External sector, reserves and debt sustainability - Current account and financing - Current account deficit narrowed to 6.6 percent of GDP in 2019 (staff estimate); FDI financed the deficit with FDI at 8.0 percent of GDP in 2019 (reinvested earnings 2.9 percent of GDP). - Copper and gold exports from the new mine expected to add 1.7 percent of GDP to exports by 2023. - Current account projected to converge to 4.8 percent of GDP by 2024. - External debt and NIIP - Gross external debt (percent of GDP, 2019): 163.1 (memorandum; other table shows 166.3 baseline in DSA table). - NIIP expected to have reached -99.5 percent of GDP by end-2019. - External debt projected to stabilize around 161–166 percent of GDP in the medium term (Table entries: 2019 = 163.1; 2020 = 166.3; 2025 = 161.1). - Reserve adequacy and liquidity - Reserve coverage below standard metrics; Panama is fully dollarized and lacks a central bank; net international reserves below standard reserve adequacy metrics. - Public liquid assets over 4 percent of GDP; Sovereign Wealth Fund about 2 percent of GDP. - DSA and public debt (selected figures) - NFPS gross debt projections (Table 4): 2019: 40.8; 2020: 41.5; 2021: 41.5; 2022: 40.7; 2023: 40.0; 2024: 39.4; 2025: 38.7. - Baseline DSA (Annex IV): Nominal gross public debt 2018: 36.2; 2019: 36.8; baseline stress and alternative scenarios presented with peak external debt outcomes (e.g., growth shock peak 171; combined shock 169; one-time 30 percent real depreciation peak 235). ### Cobre Panama (Annex V) — scale, impacts and fiscal treatment - Project scale and production - Development cost approximately US$6.7 billion (10.3 percent of GDP). - Commercial production started September 2019; operating at an estimated 80 percent of capacity, expected full capacity by 2022-23. - Expected lifetime: 36 years (2019–2054); average annual production 320,000 tons of copper (peaking at 377,000) and 100,000 oz of gold. - Economic and local impacts - Expected exports around US$2 billion a year during lifetime (about 3 percent of GDP). - Employment expected about 4,000 during operation; construction phase employed about 13,000; current estimate 6,000 in mining operations and 1,000 in construction (91 percent Panamanian). - Local infrastructure and community investments noted. - Fiscal treatment and risks - Fiscal payments: 2 percent royalty on gross production; 25 percent CIT on earnings. - CIT exemption applies while company has outstanding construction/development debt (expected ~10 years); tax credit on development expenses up to 50 percent; reduced municipal fees and land rental tax of US$3.0 per hectare per year. - Risks: legal uncertainty from Supreme Court 2018 ruling on Law 9; environmental hazards and social impacts; limited national experience in supervising mining activity. ### Panama Canal risks and water security (Annex VI) - Canal contributions and vulnerabilities - 2019 Canal traffic generated revenues of US$2.6 billion (about 4½ percent of GDP); US$1.8 billion transferred to the budget. - 2019 drought led to historically low water levels; ACP limited vessel size when necessary. - Water infrastructure challenges: Gatun and Alajuela lakes supply Canal and about half of population; about one-half of drinking water lost before reaching consumer. - Policy actions needed: investment in water infrastructure and management; ACP considering new water sources and a new water charge for ships. ### Structural reforms, inclusion and productivity - Key structural priorities - Labor market: improve hiring/firing practices, reduce restrictions on employment of foreign workers, prioritize education reform to boost secondary enrollment and improve schooling quality. - Investment climate: address governance and institutional deficiencies, strengthen fiscal governance and AML/CFT framework, reduce red tape, professionalize public administration, improve insolvency framework and judicial contract enforcement. - Technology and innovation: invest in R&D, leverage high-speed internet connectivity to attract technologically sophisticated businesses beyond special economic zones. - Social policy: eliminate coverage gaps in poverty support programs, enhance opportunities for women and indigenous groups, improve rural infrastructure and public services, implement multi-year policy strategy and sustainable investment plan. - Productivity findings - Growth historically driven by capital accumulation; total factor productivity negative in 2010–19 period per growth accounting. - Growth accounting (presented): Labor 1.7/0.8/0.7 (2000–09, 2010–19, 2020–25 proj. formatting in source); Human Capital 0.3/0.2/0.2; Capital 2.9/7.2/4.6; TFP 0.7/-2.0/-0.5; GDP 5.6/6.2/5.0 (as presented in source). ### Data gaps and statistical capacity - Key data issues - Need more timely and accurate expenditure-side national accounts; more frequent labor market indicators; close data gaps on housing prices and private indebtedness. - No adequate data on commercial real estate prices, loan write-offs, loan-to-value ratios, leverage indicators for households and corporates, or mechanisms to monitor debtor income post-loan. - Quarterly BOP data available with one-quarter delay and subject to revisions; outward FDI and repatriation data incomplete for nonfinancial private sector. - Progress and assistance - Panama a subscriber to e-GDDS since October 2018 and published NSDP; transition to SDDS recommended. - STA and CAPTAC-DR providing technical assistance on ROSCs and other issues. ### Authorities’ views and implementation status - Authorities broadly agreed with staff’s views on outlook and risks and optimistic about 2020 and medium-term growth given copper mine activity and expected recovery in investment. - Authorities prioritize exiting the FATF grey list and advancing AML/CFT recommendations; see technical assistance from the Fund as valuable. - Authorities committed to fiscal discipline while supporting the weak economy; modified deficit ceiling to permit gradual adjustment. - Authorities have paid identified arrears, are strengthening recording of fiscal accounts, and are undertaking tax and customs administration reforms; appointment process for fiscal council members ongoing. - Financial authorities advancing Basel III implementation, drafting bank resolution law, and developing a five-year regulatory reform masterplan; regulatory sandbox for fintech underway. *IMF staff report, March 9 and March 17, 2020 (excerpts as presented in the source material).* ### 3.1 percent of GDP in 2019, while previously unrecorded arrears of over 2 percent of ### PANAMA ### Recent developments - Growth and activity - Real GDP grew by about 3 percent in the first three quarters of 2019 (y/y). - Cobre Panama launched full-scale commercial production and the economy is estimated to have grown at 3½ percent in 2019. - The economic slowdown began in mid-2018 due to a construction strike; output began to recover in the last quarter of 2019. - Unemployment increased to 7.1 percent in August 2019 (from 6.0 percent a year before). - Inflation and credit - Headline CPI inflation was persistently subzero for most of 2019. - Credit growth decelerated to its lowest level in a decade: 2.5 percent in November 2019 (y/y). - Lending rates remained relatively stable; deposit growth slowed and NPLs remained low and stable. - Fiscal developments - The fiscal deficit reached 3.1 percent of GDP in 2019. - Previously unrecorded arrears of over 2 percent of GDP (US$1½ billion) were uncovered; authorities are re-estimating fiscal accounts to accrue unrecorded expenditures. - Staff estimates revised the 2018 deficit upward to 3.2 percent of GDP (from 2 percent). - The government modified the Social and Fiscal Responsibility Law (SFRL) in October 2019, widening the 2019 deficit ceiling from 2 to 3½ percent of GDP and foreseeing gradual reduction to 2¾ percent for 2020. - Gross debt of the Central Administration rose to 46.2 percent of GDP, and 40.2 percent of GDP on a net basis. - The gross debt of the NFPS reached 40.8 percent of GDP in 2019; net debt amounted to 28.0 percent. - External sector and migration - The external current account deficit is reported to have improved to 6½ percent of GDP in 2019. - Staff estimates also indicate the current account deficit fell to 6.6 percent of GDP in 2019 (from 8.2 percent in 2018). - FDI remained high at 8 percent of GDP in 2019 and continued to finance the current account deficit. - Sovereign spreads are below the average of emerging economies with similar credit rating and have declined recently in tandem with peers. - Preliminary estimates indicate the number of Venezuelan migrants in Panama reached 130,000 in 2019 (about 3 percent of the population and ⅓ of total inward migration). ### Outlook and risks - Growth and inflation projections - Growth is expected to recover to 4.8 percent in 2020. - Over the medium term, growth is expected to stabilize at its potential annual rate of 5 percent. - Inflation is expected to pick up to 1 percent y/y in 2020 and stabilize at 2 percent y/y in the medium term. - External and fiscal projections - The external position is projected to continually improve, reducing the current account deficit to 5 percent of GDP by 2023. - The fiscal balance is expected to gradually improve—in line with the amended fiscal rule—with the non-financial public sector (NFPS) deficit converging to 2 percent of GDP by 2022. - Risks (balance tilted to the downside) - Domestic risks include setbacks in resolving fiscal policy imbalances and complying with the FATF action plan to exit the grey list. - External risks include rising protectionism, weak global growth, coronavirus, sharp rise in risk premium that exposes vulnerabilities, an intensification of geopolitical tensions, cyberattacks, natural disasters and extreme climate events. ### Financial integrity and governance - FATF and AML/CFT - Panama returned to the Financial Action Task Force (FATF) grey list in June 2019, cited for a low level of effectiveness in implementing its AML/CFT regime and some technical deficiencies. - Policy recommendations include updating the national AML/CFT risk assessment and demonstrating the ability to prosecute money laundering cases involving foreign tax crimes. - Governance and transparency - Further strengthening the fiscal framework transparency and governance can support policy credibility and reduce vulnerabilities to corruption. ### Policy advice and structural reforms - Fiscal policy - A gradual fiscal consolidation can address the large fiscal imbalances while being mindful of the weak economy. - Tax and customs administration reforms are needed to address the shortfall in revenues and provide room for public investment and social spending. - Financial system resilience - Measures to bolster the financial system should include: - adoption of regulations on banking resolution, cybersecurity, and fintech; - elaboration of a crisis management plan; and - developing a mechanism to provide emergency liquidity to the financial system. - Structural reforms for inclusive growth - Structural reforms are needed to lift barriers to long-term growth by improving competitiveness, reducing poverty and inequality and addressing climate risks, to support healthy and inclusive growth and preserve Panama’s competitive advantage as an attractive destination for business. *IMF staff report, March 9, 2020.* ### 10. The balance of risks is tilted to the downside. Main domestic risks to growth are related ### 1panea2020001 - 10. The balance of risks is tilted to the downside. Main domestic risks to growth are related ### Balance of risks and key vulnerabilities - Balance of risks is tilted to the downside. - Main domestic risks to growth: - Setbacks in exiting the FATF grey list and complying with SFRL deficit ceilings, which could expose Panama to reputational damage and potential pressures on correspondent banking relationships. - Continued oversupply in the domestic property market, which could adversely impact financial stability and the real economy through a price correction and rising NPLs. - Social tensions that could disrupt economic activity and cause policy missteps. - Notable external risks: - Slowdown in Canal activity. - Weaker-than-expected global growth. - Escalating trade tensions. - The spread of coronavirus. - Erosion in competitiveness due to U.S. dollar appreciation. - Sharp tightening of global financial conditions leading to rising domestic interest rates, driving up debt service and refinancing costs. - Cyberattacks that can bring significant disruptions to digital infrastructure. - Climate-change related weather events that can adversely affect Canal activity, agriculture and tourism. ### Medium-Term Macroeconomic Outlook (selected projections and indicators) - Real GDP growth (Est./Projections): 2016: 5.0; 2017: 5.6; 2018: 3.7; 2019: 3.5; 2020: 4.8; 2021: 5.0; 2022: 5.0; 2023: 5.0; 2024: 5.0; 2025: 5.0 (In percent) - Output gap: 2016: -0.1; 2017: 0.7; 2018: 0.0; 2019: -0.9; 2020: -0.5; 2021: -0.2; 2022: 0.0; 2023: 0.0; 2024: 0.0; 2025: 0.0 (In percent) - CPI inflation (average): 2016: 0.7; 2017: 0.9; 2018: 0.8; 2019: -0.4; 2020: 0.5; 2021: 1.5; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0 (In percent) - Private credit growth: 2016: 8.4; 2017: 6.5; 2018: 4.5; 2019: 3.1; 2020: 5.4; 2021: 6.6; 2022: 7.1; 2023: 7.1; 2024: 7.1; 2025: 7.1 (In percent) - Overall balance (In percent of GDP): 2016: -2.0; 2017: -2.2; 2018: -3.2; 2019: -3.1; 2020: -2.7; 2021: -2.5; 2022: -2.0; 2023: -2.0; 2024: -2.0; 2025: -2.0 - Structural primary balance (In percent of GDP): 2016: -0.3; 2017: -0.7; 2018: -1.5; 2019: -1.3; 2020: -0.8; 2021: -0.6; 2022: -0.1; 2023: -0.2; 2024: -0.3; 2025: -0.4 - Public debt (gross, NFPS 1/): 2016: 34.8; 2017: 34.8; 2018: 36.8; 2019: 40.8; 2020: 41.5; 2021: 41.5; 2022: 40.7; 2023: 40.0; 2024: 39.4; 2025: 38.7 (In percent of GDP) - Public debt (net 2/): 2016: 20.3; 2017: 22.9; 2018: 25.8; 2019: 28.0; 2020: 29.3; 2021: 29.9; 2022: 29.8; 2023: 29.8; 2024: 29.7; 2025: 29.6 (In percent of GDP) - Current account balance (In percent of GDP): 2016: -7.8; 2017: -5.9; 2018: -8.2; 2019: -6.6; 2020: -6.4; 2021: -6.2; 2022: -5.9; 2023: -5.3; 2024: -4.8; 2025: -4.8 - Foreign direct investment (In percent of GDP): 2016: -7.9; 2017: -6.9; 2018: -7.9; 2019: -8.0; 2020: -7.3; 2021: -7.1; 2022: -6.9; 2023: -6.6; 2024: -6.6; 2025: -6.6 Sources noted in the text: Ministry of Economy and Finance; INEC; SBP; and IMF staff calculations. 1/ Non-Financial Public Sector (NFPS) as defined in Law 31 of 2011. 2/ NFPS gross debt minus deposits at the National Bank (BNP) and financial assets at Panama's Savings Fund. ### Authorities’ views on outlook and risks - Authorities broadly agreed with staff’s views on the outlook and risks. - They were optimistic about the outlook for 2020 and medium-term growth prospects given the copper mine activity and a recovery in private investment. - They remain mindful of reputational costs of remaining on the FATF grey list and of postponing fiscal consolidation. - Authorities emphasized importance of risks from trade tensions, weak growth in key trade partners, the coronavirus outbreak, and climate-change related extreme weather events. - They agreed with staff’s assessment of public debt sustainability and external stability. ### A. Turning Around Fiscal Policy — Addressing fiscal imbalances - A gradual fiscal consolidation effort is needed given relatively large fiscal imbalances and the weak economy; a strong adjustment risks weakening the economy when the main source of imbalance is lower tax revenues mostly related to slow growth. - Policy response delayed due to change in government in July 2019; still-low revenues widened the deficit in second half of 2019. - Unrecorded arrears from previous years of over 2 percent of GDP were uncovered (and already paid), adding to public debt. - Government modified the deficit ceiling to 3½ percent of GDP in 2019 with a gradual adjustment to 2 percent of GDP by 2022 to avoid abrupt fiscal tightening. - Debt of the Central Administration reached about 46 percent of GDP at end-2019, a 4½-percentage point increase compared to 2018. - Revenue underperformance is cyclical and structural; NFPS revenue fell by about 1½ percent of GDP in 2019 despite high receipts from the Panama Canal Authority. - Tax revenue shortfall was 1 percent of GDP in 2019; tax collections have fallen by about 3 percentage points of GDP over the last decade. - Non-tax revenues mainly come from the Canal and will decrease over time as a share of GDP as effect of expansion fades. Policy recommendations / measures highlighted: - Strengthen tax and customs administrations, including governance, human resources, limits on discretionary powers, reform control processes, improve data collection and management. - If administrative reforms are insufficient, revisit tax exemptions and tax policy to counteract erosion of tax base. - Address legal uncertainty created by Supreme Court ruling in 2018 affecting copper mine tax revenues (see Annex V referenced). - Contain current expenditure growth to make room for public investment while being mindful of social spending. - Rebalance current expenditure toward social spending, especially education, and improve effectiveness of social spending. - Review capital spending regularly to ensure effectiveness and high quality. - Use PPP law to leverage private finance for public investment (no concrete projects announced so far). - Pension system reforms needed to align contributions with expected payouts; mixed scheme reserves supplement contributions until 2035; undertake gradual reforms early to avoid larger future adjustment. ### A. Turning Around Fiscal Policy — Strengthening the fiscal framework - Need to demonstrate commitment to fiscal discipline and strengthen policy credibility after several modifications of fiscal rule. - Fiscal policy is Panama’s main macroeconomic stabilization tool in absence of independent monetary policy; SFRL deficit ceiling anchors discipline but limits countercyclical policy. - Consider adapting fiscal policy design to minimize procyclicality, e.g., use a “shadow” structural fiscal rule to build buffers: set deficit below ceiling after 2022 in upturns to create buffers while near ceiling in downturns. - Note: The primary surplus under the modified SFRL for 2022 is ¼ percent of GDP which coincides with the structural primary surplus. Consider targeting an overall fiscal deficit of 1½ percent of GDP in 2023 and thereafter (rather than 2 percent) to accumulate fiscal buffers while observing the SFRL. - Appointing members of the fiscal council will allow monitoring of fiscal policy and informing public debate; Law to create independent fiscal council approved in October 2018 but no members appointed yet. - Strengthen transparency and recording of fiscal accounts: - Migrate towards accrual accounting of budgetary expenditures. - Prevent future accumulation of unrecorded arrears by strengthening budgetary execution rules and penalties. - Monitor fiscal risks from contingent liabilities, including PPP contracts. - Ensure transparent execution of budget process and clear consequences for misuse of public funds. Authorities’ actions and views: - Authorities committed to fiscal discipline but see need to support weak economy. - Modified deficit ceiling permits gradual adjustment through revenue and expenditure measures. - Prioritized tax and customs administration reforms expected to show some results in current year. - 2020 budget foresees reduction in current expenditure compared to previous year’s budget. - Authorities have paid identified arrears to private sector and are discussing measures to prevent future unrecorded arrears. - Recording of fiscal accounts is being strengthened; appointment process for fiscal council members is ongoing. ### B. Bolstering Financial Integrity and Tax Transparency Findings: - Panama placed on FATF grey list for shortcomings in effectiveness of AML/CFT regime and legal framework despite scaling up technical compliance from 8 to 87 percent in four years. - FATF called for action in four areas: - (i) Enhance national AML/CFT policy by better understanding ML/TF risks. - (ii) Enforce legal action against AML/CFT violations, identify unlicensed money remitters, enhance supervision of DNFBP. - (iii) Verify and update beneficial ownership information. - (iv) Demonstrate ability to investigate and prosecute money laundering involving foreign tax crimes and provide constructive and timely international cooperation. Measures taken and recommended priorities: - 2019 measures include criminalizing tax evasion and improving due diligence to detect fiscal crimes in banking transactions. - Recently adopted regulations and steps include: - Creating the Superintendency of Non-financial Subjects (formerly an intendency). - Introducing criminal penalties for unlicensed money remitters. - Creating a single registry for final beneficiaries of offshore entities. - Amending tax evasion legislation. - Suspending 381,000 dormant entities from the public registry. - Creating a working group with France to cooperate on fiscal and financial transparency and AML/CFT measures. - Urgent creation of a roadmap to undertake necessary reforms to exit FATF watchlist; absence of action risks severing correspondent bank relationships, drying up domestic liquidity and stifling growth. Other international assessments: - OECD Global Forum upgraded Panama to “partially compliant” with global tax-transparency standard; noted remaining challenges including availability of accounting documentation for dormant entities and slow response to exchange-of-information requests. - European Union added Panama to its list of non-cooperative tax jurisdictions in February 2019 citing lack of progress on relevant reforms. Authorities’ views: - Exiting the FATF grey list is a top priority. - Authorities advancing FATF recommendations and optimistic that recent legislative initiatives will enhance AML/CFT framework and prosecutorial capacity for money laundering and foreign tax crimes. - Noted progress since GAFILAT’s latest review: criminalizing tax evasion, enhancing due diligence in banking, and raising public awareness. - Technical assistance from the Fund viewed as valuable. ### C. Reinforcing Financial System Resilience Findings on financial system soundness: - Financial system remains sound; private credit remained elevated at above 80 percent of GDP. - Financial soundness indicators suggest Panama’s onshore banking system remained resilient. - Loss-absorbing buffers are adequate with capital exceeding regulatory requirements; banks remain profitable and asset quality is sound. - Gross NPL ratio stabilized at around 2 percent and remains well-provisioned. - Liquidity buffers could be strengthened: liquid assets cover only one third of short-term liabilities. - Authorities adopted Basel III-related liquidity rules in 2018; liquidity coverage ratio (LCR) to be phased-in by 2022. - Publication of Financial Stability Report welcomed for transparency. Pockets of vulnerability and recommended monitoring: - NPL concentration: construction, commerce and the Colon Free Zone (CFZ). - Oversupply in some property segments, especially high-end market; prices have weakened only moderately but a sharp contraction could trigger macrofinancial spillovers and increase NPLs. - Authorities enforced sectoral capital requirements on loans to households and corporations since 2016; loans are well-collateralized. - Extension of preferential interest rate to real estate valued under US$180,000 contributes to growing mortgage loans; subsidy covered by government thus limited risk to banks. - Credit to households is main driver of banks’ credit and warrants careful monitoring due to rising household indebtedness. - Recommend developing formal price indices for all residential and commercial properties, in addition to recently developed price index of new housing (VNPI). - Cooperative financial sector risks appear limited (about 2 percent of overall financial system) but are not well known and warrant attention. Authorities’ stance: - Authorities surveil the housing market; staff welcomes surveillance and policy steps noted above. *Source: IMF staff report content (1panea2020001 - section 10).* ### 26. The authorities should continue strengthening the financial system through ### 26. The authorities should continue strengthening the financial system through ### Financial oversight and banking-sector supervision - Transition to Basel III standards is well advanced and continues to make progress with the gradual implementation of the LCR. - The Panama’s Superintendency of Banks (SBP): - continues to preside the Financial Coordination Council, - participates in joint supervision of financial conglomerates, - conducts risk-based supervision and stress tests of the banking system. - In 2019, the SBP intervened, first taking control, and subsequently enforcing liquidation of All-bank (with no discernable consequences for financial stability). - All-bank was a small bank with only 0.4 percent of total deposits in the system. - The SBP had taken administrative and operational control of All-bank in September 2019, following intervention of the Banco del Orinoco, NV, a bank controlled by the same group in Curaçao by the local regulator. - All-bank had a quarter of its liquid assets in Banco del Orinoco, NV, which also managed a third of its investments in securities. - Adoption of the International Financial Reporting Standard (IFRS-9) in January 2018 resulted in improved provisioning coverage. - CAPTAC-DR is providing technical assistance in several areas related to financial oversight. ### Macroprudential framework, liquidity, and resolution toolkit - Developing macroprudential tools and further upgrading the regulatory framework are needed to prevent the buildup of vulnerabilities. - In the absence of a central bank (which traditionally serves as the lender of last resort), banks self-insure against shocks by holding high levels of liquidity (almost 60 percent of deposits). - While the current system reduces moral hazard, the additional liquidity is costly and limits the supply of credit, creating pressures on interest rates. - Policy options recommended to mitigate systemic liquidity risk and strengthen confidence: - introduce an emergency liquidity facility, - introduce a limited deposit insurance scheme, - prompt adoption of the draft law on the bank resolution framework to broaden the resolution toolkit, - formalize a crisis management plan, - implement capital conservation buffers, - introduce additional capital requirements for systemically-important banks, - implement the net stable funding ratio (NSFR, in line with Basel III), - expand the macroprudential policy toolkit by establishing a limit on the household’s debt-service-to-income ratio. - Authorities are drafting a bank resolution law and considering: - adoption of Basel standards on capital conservation buffers for all banks, - capital surcharge for domestic systemically important banks, - strengthening the stress-testing framework for banks. - A quantitative impact study will be conducted before the NSFR is considered as the implementation of the LCR is still in progress. ### Financial soundness and indicators (selected exact figures) - Total deposits-to-total loans ratio: 112.6, 112.8, 110.2, 110.5, 109.3, 107.1, 104.5, 106.3, 105.9, 106.4, 107.0 (quarterly series shown for 2017–2019). - Leverage ratio (%): 11.0, 11.3, 11.6, 11.4, 11.3, 11.5, 11.6, 11.3, 11.7, 12.0, 12.2. - ROA: 1.4, 1.5, 1.5, 1.5, 1.6, 1.6, 1.5, 1.5, 1.5, 1.5, 1.4. - ROE: 13.2, 13.6, 13.1, 13.5, 13.9, 13.7, 12.7, 12.8, 13.0, 12.4, 12.2. - NPL ratio: 1.5, 1.5, 1.7, 1.4, 1.7, 1.8, 1.9, 1.7, 1.8, 1.8, 1.9. - NPL ratio change (%, annual): 30.5, 39.4, 28.5, 14.0, 11.5, 21.6, 12.2, 18.8, 6.4, -1.6, -2.5. - Credit cycle indicators and overall financial sector ratings are reported across 2017–2019 (indicator-specific thresholds based on GFSR, Dell'Arricia et al. (2012), Key Aspects of Macroprudential Policy (2013), Staff Guidance Notes on Macroprudential Policies (2014), Basel III, and MCM's expert judgement). ### Fintech, connectivity, and cybersecurity - Promotion of fintech has potential to modernize Panama’s financial system, improve intermediation and enhance financial inclusion. - Panama’s advantages: - Located close to a digital interconnection of submarine cables, - access to internet bandwidth higher than most OECD countries, - relatively high mobile phone usage: 77 percent of adults. - Staff encourages authorities to put in place robust cybersecurity and fintech regulatory frameworks to mitigate risks. - A regulatory sandbox is underway for developing fintech. ### Authorities’ views on financial stability reforms - Authorities concurred on the soundness of the financial system and remain committed to fortifying regulatory oversight. - A five-year masterplan on regulatory reforms is underway with appointment of a new Bank Superintendent. - Authorities aware of real estate market risks and actively monitoring developments. - Confidentiality concerns will need to be addressed before macroprudential limits on household debt could be introduced. - Authorities considering adoption of: - capital conservation buffers, - capital surcharge for domestic systemically important banks, - strengthening the stress-testing framework. - A quantitative impact study will precede NSFR consideration; LCR implementation is still in progress. - A bank resolution law is being drafted; a regulatory sandbox for fintech is underway. ### Supporting sustainable and inclusive growth — key findings and recommendations - Panama has been the fastest-growing economy in the region over the last two decades but lags peers in income-group social policy outcomes. - Social policy deficiencies identified: - educational enrollment and academic outcomes among the lowest in the region, - persistent rural poverty, especially in the comarcas, - gender inequality (high labor force participation gap; very high rates of adolescent births; elevated maternal mortality rates compared to peers; political underrepresentation for women), - social protection programs need improved effectiveness. - Growth drivers and challenges: - High growth over the last decade driven mostly by investment; total factor productivity was negative (see Annex VII). - Future growth will increasingly rely on productivity improvements as investment rates are expected to fall to more sustainable levels while population growth will moderate. - Specific reform priorities: - Labor market: improve hiring/firing practices, reduce restrictions on employment of foreign workers, prioritize education reform to boost secondary enrollment and improve quality of schooling. - Investment climate: address governance and institutional deficiencies, strengthen fiscal governance and AML/CFT framework, reduce red tape, professionalize public administration, resolve insolvency framework weaknesses, improve judicial system for contract enforcement and property rights in rural areas. - Technology and innovation: invest in research and development, leverage proximity to high speed internet to attract technologically sophisticated businesses and expand positive spillovers beyond special economic zones. - Social policy strengthening: - eliminate gaps in coverage and improve efficiency of poverty support programs, - enhance economic opportunities for women and indigenous groups, - improve basic infrastructure and public services in rural areas, - implement a multi-year policy strategy and a sustainable investment plan given the state’s limited revenue base; seek support from experts (see 2020 SIP). ### Climate, water security, and infrastructure - Panama’s contributions to global greenhouse gas emissions are low, but adherence to climate-change mitigation policies is important. - Commitments include meeting growing electricity demand with mostly renewable energy (Doha commitment), promoting new technologies for energy efficiency, generation, storage, transmission and distribution, sustainable forest management (reforestation and agroforestry), and protecting water resources. - Water infrastructure and management: - Artificial lakes Gatun and Alajuela supply the Panama Canal and around half of Panama’s population with fresh water. - El Niño-induced droughts have forced the Canal administration to limit cargo; this could happen more often without policy action. - Despite abundant rainfall, water losses are high due to lack of investment in water infrastructure; around one-half of drinking water is currently lost before reaching the consumer. - Policy actions needed: investment in water infrastructure and water management to secure supply for human consumption, agriculture, and sustainable functioning of the Canal. - Authorities agreed on the importance of enhancing water resource management and adhering to Doha commitments given vulnerability to extreme weather events. ### Data reporting and statistical capacity - Enhancing autonomy and capacity of the National Institute of Statistics and Census (INEC) is crucial to bring data quality in line with per capita income. - The new government prioritized making INEC independent from the Comptroller’s Office; this issue was included in the initial constitutional reform package. - Current data: broadly adequate for surveillance, but gaps remain: - need more timely and accurate expenditure-side data for national accounts, - more frequent labor market indicators, - close data gaps on housing prices and private indebtedness. - Since October 2018, Panama is a subscriber to the enhanced General Data Dissemination System (e-GDDS) and has published macroeconomic data through a National Summary Data Page (NSDP). - To align with best practices, Panama needs to transition to the Special Data Dissemination Standard (SDSS). - STA and CAPTAC-DR are providing technical assistance on updating the Report on the Observance of Standards and Codes (ROSCs) and other issues. ### Growth outlook and risks (staff appraisal) - Growth is expected to rebound in 2020. - Economic activity is projected to recover after a slowdown in 2018–19, supported by full-scale copper production and robust private investment. - Growth over the medium-term is expected to remain at its potential. - Key risks: - setbacks in exiting the FATF grey list, - complying with SFRL deficit ceilings, - slowdown in Canal traffic amid escalating trade tensions, - weak growth in key trade partner countries, - the coronavirus outbreak. - External position: while external imbalances are expected to decline over the medium-term, the external position is moderately weaker than fundamentals and desirable policy settings. ### Growth accounting (exact table entries as presented) - Growth Accounting - (Contributions to growth, percent) - Proj. - 2000-09 2010-19 2020-25 - Labor 1.70.8 0.7 - Human Capital0.30.20.2 - Capital2.9 7.24.6 - TFP0.7-2.0-0.5 - GDP5.66.25.0 *Source: IMF staff summary of 1panea2020001 - 26. The authorities should continue strengthening the financial system through* ### 38. Sustained fiscal discipline is required for fiscal policy credibility and to keep public ### 1panea2020001 - 38. Sustained fiscal discipline is required for fiscal policy credibility and to keep public ### Fiscal discipline and public debt - Central Administration debt reached 46.2 percent of GDP in 2019 amid a relatively high deficit exacerbated by newly discovered unrecorded arrears. - The modified gradual adjustment of the deficit ceiling under the SFRL is appropriate to smooth the pace of necessary fiscal consolidation. - The authorities should consider using a “shadow” structural rule in the future to build fiscal buffers. ### Revenue mobilization and expenditure realignment - A realignment of fiscal revenue and expenditures is imperative to sustain growth. - Improve capacity of tax and customs administrations. - Review Panama’s complex tax exemptions that continually erode the tax base. - Realign current spending with social needs, including by investing more in education, and improve the effectiveness of social spending to achieve sustainable and inclusive growth. - Carefully assess and prioritize capital projects going forward. ### Pensions - The pension system needs to be strengthened. - With slowing population growth, authorities need to gradually align pension contributions with expected payouts to avoid undue long-run burdens on public finances. - Given political sensitivity, a slow-paced approach to adjustments is recommended. ### Fiscal framework and budget execution - Strengthening the fiscal framework is essential to improving the macroeconomic policy toolkit. - The emergence of sizable unrecorded arrears highlights the need to: - Strengthen budgetary execution rules and misuse penalties. - Streamline the recording of fiscal accounts by limiting the use of turnkey projects and deferred payment contracts in public investment projects. ### Anti–money laundering, countering financing of terrorism, and tax transparency - Exiting the FATF grey list must remain a priority. - Continue addressing deficiencies in Panama’s AML/CFT regime and legal framework identified by the FATF. - Address shortcomings identified in the 2019 Global Forum review on global tax transparency, including by responding to exchange-of-information requests in a timely manner. ### Financial sector resilience and data gaps - The financial sector remains robust, but macrofinancial risks warrant continued monitoring. - Address data gaps on household and corporate balance sheets and property prices. - Improving housing price indices would facilitate financial-sector surveillance. ### Prudential regulation and crisis frameworks - The alignment of prudential regulations with Basel III is welcome. - Authorities should focus on macroprudential tools and further upgrade the regulatory toolkit. - Put in place robust frameworks for crisis management, including: - Adequate liquidity support for banks. - Enhancing the range of resolution tools available to failed banks. ### Fintech and digital finance - The fintech sector holds potential provided an appropriate regulatory framework. - Adopt cybersecurity and fintech regulatory frameworks and capitalize on Panama’s digital and mobile connectivity to: - Position Panama as a regional fintech hub. - Enhance financial inclusion. - Lower intermediation costs. ### Structural reforms for sustained growth - Reinforcement of the structural reform agenda is necessary to maintain high potential growth. - Required actions include: - Continued improvements in productivity and competitiveness. - Strengthening policies related to labor mobility, governance, and institutional capacity. - Enhancing innovation and technological sophistication in key industries. - Upgrading workforce skills, streamlining the insolvency framework, and improving the functioning of the judicial system to remain an attractive destination for doing business. ### Social inclusion and equity - Addressing social inequities is urgent. - Revamp social policies to maintain broad-based and inclusive growth with strategic action in: - Education. - Gender equality. - Social protection programs. - Poverty reduction in the comarcas. ### Climate change and natural resource management - Panama’s climate change mitigation strategy and commitments are welcome. - Beyond “green” energy provision, authorities should prioritize natural resource preservation given susceptibility to extreme weather events. - Increasing pressure for better water management arises from expanded Canal operations and a growing population. *Source: IMF country report excerpt.* ### 49. Staff propose that the next Article IV consultation takes place on the standard ### 1panea2020001 - 49. ### Socio‑Economic Indicators - Population (millions, 2018): 4.2 - Population growth rate (percent, 2018): 1.6 - GDP per capita (US$, 2018): 15,507 - Life expectancy at birth (years, 2017): 78.1 - Total unemployment rate (August, 2019): 7.1 - Poverty line (percent, 2017): 20.7 - Adult literacy rate (percent, 2018): 95.4 - Observations from figures: - Per capita income is the highest in Latin America but inequality remains high relative to regional peers (GINI Index, shown for 2010 and 2017). - Labor force participation rates and infant mortality are broadly comparable to regional peers; life expectancy is higher than in most regional peers. *Sources cited in figures: WEO, October 2019; World Bank, World Development Indicators, and IMF staff calculations.* ### Real Sector Developments - Real GDP growth (2019): 3.5 (Table 1, Real GDP) - Recent dynamics: - Economic slowdown persisted for over a year. - Plummeting construction sector and continued weakness in the Colón Free Zone (CFZ) are key drags. - Transport and communication sectors remain healthy and support activity. - Strong consumption has partially offset declining investment. - Prices reached negative inflation in mid‑2019 reflecting weak demand (CPI average for 2019: -0.4 percent; CPI end‑of‑year 2019: -0.1 percent; Table 1). - Aggregate employment growth slowed with divergent sectoral dynamics. ### Fiscal Developments and Public Finances - Consolidated overall balance (including ACP), 2019: -2.7 (in percent of GDP; Table 1 and Table 2) - Revenue and expenditure (2019, percent of GDP): Revenue 20.4; Expenditure 23.4 (Table 1) - Tax revenue (2019, percent of GDP): 8.6 (Table 2: Tax revenue series) - Public investment has fallen after completion of several large infrastructure projects (Public Gross Fixed Capital Formation trends shown). - Public debt: - Non‑Financial Public Sector gross debt (2019): 41.5 (in percent of GDP; Table 4) - Public debt increased by over 6 percent of GDP in the past three years (figure caption). - Key fiscal features and drivers: - Low tax revenue explains most of the revenue decline. - Challenges in tax and customs administration and tax exceptions continue to affect tax and tariff collection. - Panama Canal fees and dividends contribute (o/w: Panama Canal fees and dividends in NFPS revenue around 2.6 in earlier years; Table 2). ### Banking Sector Soundness - Non‑performing loans (NPLs) to total gross loans (2019): 2.0 percent (Table 6) - NPLs have doubled in recent years according to figure caption; provisioning coverage improved in 2018 with adoption of stricter provisioning requirements. - Regulatory capital to risk‑weighted assets (2019): 16.5 percent (Table 6) - Regulatory Tier 1 capital to risk‑weighted assets (2019): 17.8 percent (Table 6) - Return on assets (2019, net income on average assets): 1.4 percent (Table 6) - Banks’ profitability remained stable as rising funding costs were offset by higher returns on liquid assets; net interest margins broadly stable. - Liquidity: Bank liquidity has remained ample and broadly stable (capital adequacy and liquidity ratios shown in figures and Table 6). ### Macrofinancial Developments - Private sector credit (12‑month percent change, 2019): 5.4 (Table 8) - Credit growth slowed further in 2019 driven mostly by weak private sector borrowing; composition shifted from firms to households (mortgages and personal consumption deceleration). - Domestic interest rates have been relatively stable (figures show 3‑month moving averages for deposit and lending rates). - Sovereign spreads remain among the lowest in the region (EMBIG spreads chart). ### External Sector Developments - Current account balance (2019): -6.6 percent of GDP (Table 7) - Merchandise trade and services: - Merchandise trade excluding CFZ, net (2019): -15.3 percent of GDP (Table 7) - CFZ net exports (2019): 2.3 percent of GDP (Table 7) - Services net (2019): 13.1 percent of GDP, with transportation (including Panama Canal) a dominant component (Table 7). - Panama Canal toll revenue continues to grow though at a slower rate; canal fees appear in government revenues and transfers. - External debt and financial flows: - Gross external debt (percent of GDP, 2019): 163.1 (Table 7 memorandum and Table 1/4 series) - Net foreign direct investment inflows (2019): 7.9 percent of GDP (Table 1 and Table 7) - External debt ticked up amid strong FDI inflows and high public external debt (figure caption). - Reserves and external liquidity: - Gross international reserves (end‑period, 2019): 3,834 (in millions of US$; Table 7 memorandum) - Net international investment position (2019): -99.3 percent of GDP (Table 7 memorandum) ### Key Projections and Selected Indicators (from tables) - Real GDP projections (2020–25, percent): 4.8 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025) — shown in Table 1 row "Real GDP (2007 prices)" - Consumer price index (average) projections (2020–25, percent): 0.5 (2020), 1.5 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025) (Table 1) - Consolidated NFPS overall balance (incl. ACP) projections (2020–25, percent of GDP): -2.5 (2020), -2.2 (2021), -1.7 (2022), -1.7 (2023), -1.7 (2024), -1.7 (2025) (Table 2) - NFPS gross debt projections (2020–25, percent of GDP): 41.5 (2020), 41.5 (2021), 40.7 (2022), 40.0 (2023), 39.4 (2024), 38.7 (2025) (Table 4) - Banking system aggregates (selected, end‑period): - Private sector credit (2019, millions of balboa): 58,257; projected growth to 81,689 by 2025 (Table 5) - Total deposits (2019, millions of balboa): 44,982; projected to 63,075 by 2025 (Table 5) *Italicized: Source — Figures, tables and text as presented in the IMF Panama staff report pages provided.* ### Annex I. Implementation of Past IMF Policy Advice ### Annex I. Implementation of Past IMF Policy Advice ### Executive Directors’ views - Directors stressed continued enhancement of Panama’s financial integrity through effective implementation of its AML/CFT framework and measures to strengthen tax transparency. - Emphasized the need to further strengthen the fiscal framework through a fiscal council and enhanced assessment and management of fiscal risks. - Highlighted improvements needed in tax and customs administrations. - Urged strengthening financial sector oversight, macroprudential policy and crisis management, including by aligning prudential regulations with Basel III and by putting in place robust frameworks for crisis management and bank resolution. - Called for reinforcing the structural reform agenda, including stronger social policies and improvements to the business climate. ### Fiscal policy: implementation and outcomes - Fiscal policy remains anchored on the SFRL, which was streamlined and modified in October 2018. - A bill created the fiscal council—an independent committee tasked with providing technical analysis of fiscal policy—following staff recommendations. - A collapse in tax collections in 2019 led to an unexpected deterioration in the fiscal position that required another modification to the SFRL. - Members of the Council remain to be appointed, and measures to monitor fiscal risks and contingent liabilities are still in their early stages. - The pace of reform in revenue administration, particularly in tax and customs, is short of expectations. - Key fiscal projections and figures: - NFPS deficit contained at 2¾ percent of GDP in 2020 through expenditure cuts in the absence of tax measures. - Deficit projected to converge to 2 percent of GDP by 2022 as expenditures are expected to be contained. - Gross NFPS debt increased to 40.2 percent of GDP in 2019 due to the fiscal deficit, pre-financing operations and payment of arrears, but the trend reverses to a downward trajectory falling below 38 percent of GDP by 2025. ### Financial integrity and tax transparency - Panama addressed gaps identified by the FATF and GAFILAT. - Panama criminalized tax evasion in January 2019, in line with staff advice and FATF requirements. - Strengthened legal code to more effectively penalize repeat tax evaders in September 2019. - Created the Superintendency of Nonfinancial Subjects and introduced criminal penalties for unlicensed money remitters in 2019. - Further enhancements to Panama’s legislative framework occurred in 2020 (see SIP for details). - Outstanding need: demonstrate effectiveness of legal actions by investigating and prosecuting money laundering cases and tackle other items on the FATF action plan. ### Financial sector reforms - Prudential regulation has been largely aligned to Basel III with the gradual implementation of the LCR. - Draft legislation to strengthen the banking resolution framework, developed in line with IMF technical advice, remains under consideration. ### Structural reforms - Reform implementation was delayed amid 2019 general elections, including in education, labor market flexibility, social safety nets, and infrastructure development. ### Prospects and risk assessment: growth, inflation, external position - Growth projections: - Growth projected to increase to 4.8 percent in 2020 and 5 percent in 2021 (its estimated potential), assuming adherence to the SFRL and the authorities’ plan to exit the grey list. - Over the medium term, the economy is expected to continue expanding at 5 percent. - Drivers of the projected recovery: full-year impact of copper production, recovery in construction, commerce, and services sectors, rebound in exports and private investment, and positive spillovers from recently-completed large-scale investment projects (including the Canal expansion, the large copper mine, and the new airport terminal). - Credit and banking: demand for credit expected to recover with banks intermediating funds, having ample access to external capital markets. - Inflation: expected to pick up to 1 percent in 2020 and to gradually converge toward 2 percent over the medium term. - External position and copper impact: - Copper exports projected to add an other 1½ percent of GDP to exports by 2023. - Current account deficit expected to be reduced below 5 percent of GDP. - Panama projected to continue attracting substantial amounts of FDI as it expands sea and air-transportation hubs and tourism. ### Balance of risks (tilted to the downside) — key domestic and external risks - Domestic risks (summarized): - Setbacks in improving AML/CFT and tax transparency frameworks and addressing FATF recommendations could reduce competitiveness as a regional financial center and impair FDI attractiveness. - Losses of correspondent banking relationships could dry up foreign credit, affect domestic lending, squeeze bank margins, increase credit risk, and dampen economic activity. - Continued oversupply in some property segments could trigger price corrections, increasing NPLs and lowering systemic liquidity. - Setbacks in fiscal consolidation could hamper fiscal credibility, reduce market confidence and lead to higher borrowing costs. - Weaker spillovers from large projects could lower potential growth. - Social tensions could disrupt economic activity and cause policy missteps. - Positive scenario: stronger recovery supported by copper exports could lead to higher growth in 2020. - External risks (summarized): - Escalating trade tensions, weaker-than-expected global growth and the spread of the coronavirus could affect exports and dampen government revenue via reduced Panama Canal traffic. - Pressures from real U.S. dollar appreciation could harm external competitiveness. - A sharp rise in risk premia and further buildup of financial vulnerabilities in systemic economies would increase domestic interest rates, leading to higher debt service and refinancing risks. - Cyberattacks could trigger systemic disruptions in infrastructure, affecting financial and logistics sectors. - Natural disasters and extreme climatic events could disrupt Canal activity, agriculture and tourism. ### Risk Assessment Matrix — selected policy responses - External risks policy responses include: - Continue efforts to diversify key export markets; advance structural reforms to improve productivity and strengthen competitiveness. - Build liquidity and fiscal buffers to safeguard macroeconomic stability (Coronavirus outbreak response). - Continue to deepen domestic financial markets and rebalance public sector financing to domestic sources; consolidate public finances. - Enhance crisis preparedness of Panama's regional financial center. - Domestic risks policy responses include: - Promptly implement the FATF action plan on AML/CFT and the OECD tax transparency recommendations. - Strengthen monitoring of systemic risk; develop macroprudential policy framework and strengthen financial sector crisis preparedness. - Build fiscal buffers and commit to fiscal targets below the SFRL ceilings; reform tax and customs administration. - Develop clear communication and engagement strategy with communities affected by planned policy reforms and consider distributional effects. ### External sector assessment: current account and external stability - The external position in 2019 was moderately weaker than fundamentals and desired policy settings. - The current account deficit—fully covered by FDI inflows— is estimated to have improved to 6.6 percent of GDP in 2019 (from 8.2 percent in 2018), but remains relatively large, mainly due to high investment rates. - Despite a positive real exchange rate gap, market-share and survey-based indicators suggest Panama remains highly competitive, particularly among its LAC peers. - Panama’s external stability remains closely dependent on continued financial stability and the global economic environment, particularly developments in global interest rates and world trade. - Policy focus recommended: enhance Panama’s resilience by reducing vulnerabilities and building policy buffers. *Source: 1panea2020001 - Annex I. Implementation of Past IMF Policy Advice.* ### 1. The current account deficit declined in 2019 and is projected to converge to 4.8 ### 1. The current account deficit declined in 2019 and is projected to converge to 4.8 percent of GDP by 2024. ### Current account developments and projections - In 2019 the deficit narrowed to 6.6 percent of GDP, after it had widened to 8.2 percent in 2018. - Drivers of improvement in 2019: - Start of copper production by a new mine in the second half of 2019. - Lower interest rates which improved the income balance. - Healthy growth of Canal revenues. - Copper and gold exports from the new mine are expected to add another 1.7 percent of GDP to exports by 2023. - Near-term negative impacts: - Slowing tourism receipts. - The CFZ grappling with economic challenges in its main export markets (e.g. Venezuela) and an ongoing trade dispute with Colombia. - High investment rates were the main driver of the external deficit in the past ten years. - Medium-term outlook: - External balance expected to improve as investment rates fall to more sustainable levels. - Contributions from the CFZ expected to increase on the back of initiatives that enhance the zone as a hub for regional distribution of IT and pharmaceutical products. - Projection: current account deficit projected to converge to 4.8 percent of GDP by 2024. *Sources: INEC and IMF staff calculations.* ### Assessment of external position - External Stability Approach: - Estimates external position to be moderately weaker than fundamentals if the NIIP is stabilized at its 2018 level. - Stabilization would require a real depreciation of 4.4 percent to close the external gap, implying a current account gap of -1.4 percent of GDP. - EBA-Lite (current account approach): - Suggests an underlying current account gap in 2019 of -2.7 percent. - Estimates an overvaluation of the real exchange rate of 8.7 percent. - Indicates a positive policy gap, mostly due to favorable external factors that more than offset the expansive domestic fiscal policy. - Summary: - Both methodologies point to weaknesses in Panama’s external position. - Given the importance of the large external debtor position (derived from the large and sustained FDI), the External Sustainability Approach is judged more relevant and suggests a mild overvaluation of the real exchange rate between 5 and 6 percent. ### Real Effective Exchange Rate (REER) - The REER returned to a downward trajectory by end-2019, having depreciated by 1.9 percent relative to the year before. - Appreciation pressures in the second half of 2018 were due to dollarization, strong U.S. growth and rising interest rates in the U.S. - With slowing U.S. growth and the halt in monetary tightening, risks of further appreciation eroding competitiveness are limited. - Assessment caveat: REER measurement is hampered by use of bilateral goods trade data to determine relative weights while services account for about 70 percent of exports outside of the CFZ; this may misstate Panama’s price competitiveness relative to trading partners. - Note: Panama’s NEER and REER exclude Venezuela. ### Capital and financial flows - FDI dominance: - In 2019 Panama is estimated to have received 8.0 percent of GDP in FDI, similar to 2018. - Reinvested earnings reached 2.9 percent of GDP in 2019, representing almost 2/3 of foreign entities’ profits. - An important part of FDI is in equity instruments which include reinvested earnings of large multinational companies (rather than new investment). - Role of portfolio flows: play a less important role in Panama. - Assessment: - Over the medium term, the current account is expected to remain adequately financed by FDI. - In 2018, almost 30 percent of FDI flows originated in Canada, 25 percent in Europe versus 8.7 percent from the U.S. - Panama’s status as a maritime and air transportation hub and regional financial center, paired with macroeconomic stability, is expected to continue attracting substantial investment. - Any decline in FDI receipts would likely be offset by a reduction of outflows in the primary income account. ### Foreign asset and liability position and trajectory - NIIP and external liabilities: - Panama’s net liabilities in its net international investment position are expected to have reached 99.5 percent of GDP by the end of 2019. - Increase driven by strong FDI inflows; while liabilities continued to be largely equity-related, debt instruments accounted for the latest increase. - NIIP is expected to stabilize in the medium term as the current account deficit falls. - External debt: - External debt increased to over 160 percent of GDP but remained well below the historical average. - External debt remains concentrated in private debt (about ½ related to the whole banking system, of which about ¼ are the offshore banks). - The increase was driven by FDI debt liabilities and public external debt. - Decline in non-resident deposits continued, although at a slower pace, reducing the banking sector’s foreign liabilities. - In 2015, banks’ external debt still accounted for over 60 percent of the total; now its share is 51 percent. - Assessment: - External debt expected to remain relatively high but stable over the medium term. - Deposits from non-residents projected to remain below the historical average, reducing bank liabilities as a share of GDP. - FDI continuing to finance the current account deficit will increase FDI debt liabilities as a share of external debt. - Public external debt will reach over 30 percent of GDP in 2020 but move to a downward trend as the fiscal deficit returns to comply with the fiscal rule. - While external debt will continue to increase in 2020, counteracting forces will lead to stabilization around 161 percent of GDP in the medium term. ### Other external competitiveness indicators - Services and tourism: - Panama maintaining competitiveness in main exports but faced challenges in recent years. - After over a decade of rapid expansion, tourism receipts have stagnated in the last two years; tourist arrivals have decreased in the last two years despite overall regional growth. - Services account for about 70 percent of exports outside the CFZ. - Growth in canal traffic and expansion of Tocumen airport continued to expand exports of transportation services. - Goods exports held back by slow exports from the CFZ due to trade dispute with Colombia and low demand in main export markets; start of copper exports has largely offset this. - Competitiveness indices: - Travel and Tourism Competitiveness Index 2019 (WEF) suggests Panama outperforms the regional average in many categories, especially infrastructure, and can compete in prices with Mexico or the Dominican Republic. - WEF Global Competitiveness Index: Panama dropped from 64th to 66th position but continues to outperform the LAC average in every pillar. - Progress made in ICT adoption; deterioration in skills, product market and labor market scores compared to 2017. - Doing Business Report 2020: small increase in Panama’s distance to the frontier by 0.3, reducing its score from 66.9 to 66.6. - Reforms noted: new insolvency law in 2018; online system for filing and payment of corporate income tax, value-added tax and real estate tax. - Policy implications: - Strengthening institutions (judicial independence and budget transparency), ICT adoption, labor markets and innovation capability would improve competitiveness. - Well-targeted investment in tourism infrastructure and a coordinated tourism strategy may be necessary to reinvigorate the sector. ### Reserve adequacy - Reserve coverage: - Reserve coverage remains below standard metrics, although these are not appropriate for Panama’s economy because Panama is fully dollarized and does not have a central bank. - Officially reported reserves are mostly the net foreign assets of the Banco Nacional de Panama and are distinct from international reserves in a country with its own currency. - As reported, net international reserves are below both standard reserve adequacy metrics and the IMF’s risk-based metric for emerging markets. - Financial system support and public liquidity: - Historically Panama has not provided credit or support to the financial system or private sector, and there is no lender of last resort or any institution that manages banking system liquidity. - Any concept of reserves would primarily support the public sector, which currently has liquid assets of over 4 percent of GDP. - Sovereign Wealth Fund is about 2 percent of GDP. - These public liquid assets could be considered adequate to cover the financial needs of a relatively lean government with small deficits. ### External debt sustainability scenarios and key metrics - Baseline and medium-term debt trajectory: - External debt projected to stabilize around 161 percent of GDP in the medium term. - Table 2 baseline: External debt 2019 = 166.3 (percent of GDP); projected 2020 = 166.3; 2025 = 161.1. - Debt-stabilizing non-interest current account: -15.0 (percent of GDP). - Selected baseline projections and components (Table 2, in percent of GDP unless otherwise indicated): - (a) Baseline: External debt 2015 = 161.3; 2016 = 159.9; 2017 = 149.6; 2018 = 151.8; 2019 = 163.1; 2020 = 166.3; 2021 = 166.1; 2022 = 164.4; 2023 = 163.2; 2024 = 162.2; 2025 = 161.1. - (2) Change in external debt: 2015 = 4.0; 2016 = -1.4; 2017 = -10.3; 2018 = 2.2; 2019 = 11.3; 2020 = 3.2; 2021 = -0.2; 2022 = -1.7; 2023 = -1.2; 2024 = -1.0; 2025 = -1.1. - (3) Identified external debt-creating flows (4+8+9): 2015 = -10.5; 2016 = -10.7; 2017 = -12.1; 2018 = -6.3; 2019 = -6.0; 2020 = -8.4; 2021 = -8.8; 2022 = -9.0; 2023 = -9.2; 2024 = -9.4; 2025 = -9.3. - (4) Current account deficit, excluding interest payments: 2015 = 4.9; 2016 = 3.8; 2017 = 1.7; 2018 = 3.8; 2019 = 2.8; 2020 = 3.1; 2021 = 3.0; 2022 = 2.7; 2023 = 2.3; 2024 = 2.2; 2025 = 2.5. - (8) Net non-debt creating capital inflows (negative): 2015 = -7.3; 2016 = -7.9; 2017 = -6.9; 2018 = -7.9; 2019 = -8.0; 2020 = -7.3; 2021 = -7.1; 2022 = -6.9; 2023 = -6.6; 2024 = -6.6; 2025 = -6.6. - (9) Automatic debt dynamics: 2015 = -8.0; 2016 = -6.6; 2017 = -6.9; 2018 = -2.3; 2019 = -0.8; 2020 = -4.1; 2021 = -4.6; 2022 = -4.8; 2023 = -4.9; 2024 = -5.1; 2025 = -5.3. - Contribution from nominal interest rate: 2015 = 4.1; 2016 = 4.0; 2017 = 4.2; 2018 = 4.4; 2019 = 3.8; 2020 = 3.3; 2021 = 3.2; 2022 = 3.0; 2023 = 2.8; 2024 = 2.5; 2025 = 2.3. - Contribution from real GDP growth: 2015 = -8.3; 2016 = -7.5; 2017 = -8.3; 2018 = -5.3; 2019 = -5.1; 2020 = -7.4; 2021 = -7.8; 2022 = -7.8; 2023 = -7.7; 2024 = -7.6; 2025 = -7.6. - Scenario results (Figure 1 highlights): - Baseline external debt around 161–166 percent of GDP across 2019–2021, stabilizing thereafter. - Interest rate shock scenario: peak external debt shown at 162 (box number). - Current account shock scenario: peak external debt shown at 166 (box number). - Growth shock scenario: peak external debt shown at 171 (box number). - Combined shock scenario: peak external debt shown at 169 (box number). - Real depreciation shock (one-time 30 percent) scenario: peak external debt shown at 235 (box number). *Italic: Source — IMF staff calculations and data as presented in the original content.* ### Annex IV. Debt Sustainability Analysis ### Annex IV. Debt Sustainability Analysis ### Baseline scenario – key debt and macro figures (public sector, non-financial public sector; in percent of GDP unless otherwise indicated; as of December 31, 2019) - Nominal gross public debt: 36.2 (2018), 36.8 (2019), 40.8 (2020), 41.5 (2021), 41.5 (2022), 40.7 (2023), 40.0 (2024), 39.4 (2025), 38.7 (2025) - Public gross financing needs: 6.8 (2018), 6.2 (2019), 6.4 (2020), 5.5 (2021), 5.3 (2022), 4.7 (2023), 4.8 (2024), 6.8 (2025), 4.6 (2025) - Net public debt: 25.9 (2018), 28.0 (2019), 29.3 (2020), 29.9 (2021), 29.8 (2022), 29.8 (2023), 29.7 (2024), 29.6 (2025) - Real GDP growth (in percent): 6.3 (2018), 3.7 (2019), 3.5 (2020), 4.8 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025) - Inflation (GDP deflator, in percent): 4.1 (2018), 0.9 (2019), -0.4 (2020), 0.5 (2021), 1.5 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025) - Nominal GDP growth (in percent): 10.7 (2018), 4.7 (2019), 3.1 (2020), 5.4 (2021), 6.6 (2022), 7.1 (2023), 7.1 (2024), 7.1 (2025) - Effective interest rate (in percent; defined as interest payments divided by debt stock at end of previous year): 5.8 (2018), 5.4 (2019), 5.3 (2020), 5.3 (2021), 5.3 (2022), 5.3 (2023), 5.1 (2024), 4.9 (2025), 4.7 (2025) - Sovereign spreads: EMBIG (bp) 114; 5Y CDS (bp) 42 - Ratings: Moody's Baa2; S&P's BBB; Fitch BBB ### Contributions to change in gross public sector debt (in percent of GDP) - Change in gross public sector debt (annual): -0.8 (2018), 2.6 (2019), 4.0 (2020), 0.7 (2021), -0.1 (2022), -0.7 (2023), -0.7 (2024), -0.7 (2025), -0.6 (cumulative), -2.1 (cumulative) - Identified debt-creating flows (annual): -1.3 (2018), 1.7 (2019), 2.3 (2020), 0.9 (2021), 0.1 (2022), -0.6 (2023), -0.5 (2024), -0.5 (2025), -0.5 (cumulative), -1.0 (cumulative) - Primary deficit: 0.3 (2018), 1.5 (2019), 1.5 (2020), 0.9 (2021), 0.6 (2022), 0.1 (2023), 0.2 (2024), 0.3 (2025), 0.4 (cumulative), 2.7 (cumulative) - Primary (noninterest) revenue and grants: 21.2 (2018), 19.7 (2019), 18.1 (2020), 18.1 (2021), 18.3 (2022), 18.3 (2023), 18.2 (2024), 18.1 (2025), 18.0 (cumulative), 108.9 (cumulative) - Primary (noninterest) expenditure: 21.4 (2018), 21.1 (2019), 19.5 (2020), 19.0 (2021), 19.0 (2022), 18.4 (2023), 18.4 (2024), 18.4 (2025), 18.4 (cumulative), 111.6 (cumulative) - Automatic debt dynamics (derived): -1.6 (2018), 0.2 (2019), 0.8 (2020), 0.0 (2021), -0.5 (2022), -0.7 (2023), -0.8 (2024), -0.8 (2025), -0.9 (cumulative), -3.7 (cumulative) - Interest rate/growth differential (same series as automatic dynamics): -1.6 (2018), 0.2 (2019), 0.8 (2020), 0.0 (2021), -0.5 (2022), -0.7 (2023), -0.8 (2024), -0.8 (2025), -0.9 (cumulative), -3.7 (cumulative) - Of which: real interest rate: 0.5 (2018), 1.5 (2019), 2.0 (2020), 1.8 (2021), 1.5 (2022), 1.2 (2023), 1.1 (2024), 1.0 (2025), 1.0 (cumulative), 7.7 (cumulative) - Of which: real GDP growth: -2.1 (2018), -1.2 (2019), -1.2 (2020), -1.9 (2021), -1.9 (2022), -1.9 (2023), -1.9 (2024), -1.9 (2025), -1.8 (cumulative), -11.4 (cumulative) - Exchange rate depreciation: 0.0 (all years reported) - Other identified debt-creating flows and contingent liabilities: 0.0 (all years reported) - Residual, including asset changes: 0.5 (2018), 0.8 (2019), 1.8 (2020), -0.2 (2021), -0.2 (2022), -0.2 (2023), -0.2 (2024), -0.2 (2025), -0.2 (cumulative), -1.1 (cumulative) ### Alternative scenarios and stress tests (high-level assumptions) - Baseline assumptions (selected): Real GDP growth 4.8 (2020), 5.0 (2021–2025); Inflation 0.5 (2020), 1.5 (2021), 2.0 (2022–2025); Primary Balance -0.9 (2020), -0.6 (2021), -0.1 (2022), -0.2 (2023), -0.3 (2024), -0.4 (2025); Effective interest rate 5.3 (2020–2022), 5.1 (2023), 4.9 (2024), 4.7 (2025) - Historical scenario (selected): Real GDP growth 4.8 (2020), 6.2 (2021–2025); Primary Balance -0.9 (2020), -0.6 (2021–2025); Effective interest rate 5.3 (2020), 5.3 (2021), 5.2 (2022), 4.9 (2023), 4.5 (2024), 4.3 (2025) - Constant Primary Balance scenario: Primary Balance held at -0.9 (2020–2025) - Contingent Liability Shock (example results): Primary Balance -0.9 (2020), -13.4 (2021), -0.1 (2022), -0.2 (2023), -0.3 (2024), -0.4 (2025); Effective interest rate path altered to 5.3 (2020), 6.0 (2021), 5.8 (2022), 5.6 (2023), 5.4 (2024), 5.2 (2025) ### Debt profile indicators and risk assessment (2019 benchmarks and highlighted metrics) - EMBIG (3-month average, 02-Oct-19 through 31-Dec-19): 114 bp - Upper/lower risk-assessment benchmarks employed in heat map stress tests: spreads at 200 and 600 basis points; external financing requirement thresholds 5 and 15 percent of GDP; change in share of short-term debt thresholds 0.5 and 1 percent; public debt held by non-residents thresholds 15 and 45 percent; share of foreign-currency denominated debt thresholds 20 and 60 percent. - Gross financing needs benchmark used: 15 percent of GDP (cells colored in risk table depending on exceedance) *Source: IMF staff.* ### Annex V. Economic Impact of Copper Mining (Cobre Panama / MPSA) ### Project scale and production - Cobre Panama is described as the biggest private investment project in the nation’s history, surpassing the Canal expansion; one of the world’s top 15 copper-producing projects. - Development cost of the open-pit mine: approximately US$6.7 billion (10.3 percent of GDP). - Commercial production started in September 2019; the mine is still in the ramp-up process and operates at an estimated 80 percent of capacity, expecting to reach full capacity by 2022-23. - Expected lifetime: 36 years from 2019 to 2054. - Expected annual production on average: 320,000 tons of copper (peaking at 377,000 tons per annum when at processing capacity) and 100,000 oz of gold. ### Economic and local impacts - Expected exports from the mine: around US$2 billion a year during its lifetime (about 3 percent of GDP). - Local infrastructure and community investments: new access road, electricity supply to over fourteen indigenous communities, a two-terminal port with spare capacity for non-mining use, purchases from over 1,000 local suppliers, water, sanitation, health, schooling and commercial development programs benefiting over 400 families. - Employment: expected about 4,000 jobs during operation; construction phase employed about 13,000 workers (mostly low skilled). Currently estimated 6,000 people working in mining operations and another 1,000 in construction (of whom 91 percent are Panamanian). - Skills and training: plans to phase out temporary jobs and replace expatriate specialists with locals; scholarships for high-skilled workers (mechanical engineers) and traineeships at an FQM mine in Zambia. ### Fiscal treatment and revenues - Fiscal payments required: 2 percent royalty on gross production; 25 percent corporate income tax (CIT) on earnings. - CIT exemption: CIT is exempt for the period during which the company has outstanding debt related to construction and development of the mine (FQM expects this period to last about 10 years). - Fiscal benefits received: tax credit on development expenses of up to 50 percent (equivalent to a depreciation allowance); reduced smaller taxes including municipal fees and a land rental tax of US$3.0 per hectare per year. ### Risks and concerns - Legal uncertainty: Panama’s Supreme Court ruled in September 2018 that Law 9 (used to grant the mining concession to MPSA in 1997) is unconstitutional as it did not follow the correct legal process, creating uncertainty about the royalty, tax and tariff structure binding MPSA and potentially dampening other large-scale foreign investment. - Environmental hazards and social impacts: deforestation; reduced surface water, groundwater quality and quantity; air contamination; social change associated with reallocation of some villages. Panama’s limited experience in supervising mining activity amplifies concerns. - Note: technical report reference cited as March 2019 technical report produced by FQM for listing on the Toronto Stock Exchange. *Source: IMF staff.* ### Annex VI. Challenges in the Management of the Canal ### Canal expansion and revenue - Canal expansion completed in 2016 with a second set of locks increasing vessel size capacity. - 2019 Canal traffic generated revenues of US$2.6 billion (about 4½ percent of GDP), of which US$1.8 billion were transferred to the budget. - Expansion allowed capturing new markets: large passenger cruises, liquified natural gas (LNG), expanded LPG and container ship markets; spillovers to transport and communication sectors. ### External shocks and trade dynamics - U.S.-China trade tensions had not significantly impacted overall Canal revenue thus far; declines in US-China traffic were offset by upticks in other routes (e.g., increased demand for U.S. LNG from Japan, South Korea and Mexico; new routes such as Brazil using the Canal for grain exports to China). - Medium-term uncertainty remains heightened despite some encouraging negotiation outcomes. ### Water resource scarcity and operational risk - Canal locks operate using fresh water from Gatun and Alajuela lakes, which also supply human consumption. - 2019 drought led to historically low water levels; ACP limited hydroelectric production and, when necessary, restricted vessel size allowed to cross the Canal. - Measures under study: new water sources and measures like the new water charge for ships. ### Climate change and diversification - Risks increasing from weaker external environment and climate change: supply chain disruptions (e.g., coronavirus outbreak) can weaken global trade; prolonged droughts can further disrupt trade traffic. - ACP diversification efforts: building a shipyard and developing Canal as a tourist destination to attract more cruise ships to the Panama Cruise Terminal in Amador. *Source: IMF staff.* ### Annex VII. Drivers of Growth ### Investment and capital accumulation - Panama’s growth over the last decade was fueled by very high real investment rates, peaking at 45 percent of GDP in 2015. - Growth accounting attributes the bulk of growth to capital accumulation driven by large projects (Panama Canal expansion, construction of the large copper mine). - Many large infrastructure projects have a lagged effect on economic activity; this lag helps explain disappointing total productivity growth over the same period. - With the conclusion of many large projects, investment rates are expected to normalize to below 40 percent of GDP, reducing capital’s contribution to growth; nevertheless, Panama remains attractive for private investment compared to the region. ### Labor, demographics, and human capital - Demographics: slowing population growth similar to regional trends; positive net migration but expected continued slowing population growth reducing labor’s contribution to growth. - Human capital contribution estimated to be small; investing in a skilled workforce is important for the future. - Education gaps relative to the region could lead to skilled labor shortages over the medium term (referenced 2020 SIP). *Source: IMF staff.* ### 3. Panama needs to boost productivity to ### 3. Panama needs to boost productivity to sustain high growth rates over the medium term ### Productivity trends and growth accounting - Some large investment projects are expected to reap gains from years of investment, which should boost productivity. - Recent slowdown in productivity growth may point to fundamental bottlenecks. - Productivity has been exceptionally high in some segments of the economy, while relatively unproductive sectors still make up a large share of employment. - Growth accounting components identified in the source: Human Capital, Labor, Capital, TFP, and Real GDP growth, analyzed over the periods 1990-1999, 2000-2009, 2010-2019, and 2019-2025P. ### Sectoral productivity and employment - The source highlights a wide dispersion in sectoral productivity relative to aggregate labor productivity (benchmark 100 = aggregate labor productivity). - Sectors listed (as presented in the source) include: - Agriculture and Fishing (incl. mining) - Manufacturing - Electricity, Gas & Water - Construction - Wholesale, Retail & Repair of Vehicles - Hotels & Restaurants - Transport, Storage & Communications - Financial Intermediaries - Real estate, Renting & Business Activities - Private Education - Health & Social Services - Other Community, Social & Personal Services - The sectoral employment distribution is illustrated in percent of employment (reference axis in the source shows 0, 100, 200, 300, 400, 500, 600 and an inset scale 05 101520), indicating many lower-productivity sectors account for sizable employment shares. ### Policy recommendations and structural priorities - Foster labor mobility across sectors and regions to reallocate labor from relatively unproductive to higher-productivity activities. - Further leverage Panama’s strategic location to attract high-growth industries. - Continually reform the business climate and governance to support productivity gains and sustain high medium-term growth. ### Data, institutions, and statistical context (context relevant to productivity analysis) - The informational annex was prepared by Western Hemisphere Department; the chapter references preparer Julia Faltermeier and SIP (2020) for details. - National statistical and fiscal data limitations noted elsewhere in the source include: - Timeliness and sizable revisions in real sector data; rebased GDP series and quarterly data coverage (quarterly GDP series compiled by expenditure approach are being developed). - Gaps in government finance statistics: the Panama Canal Authority (ACP) and three public enterprises are excluded from NFPS accounts and public debt; need for consistent and timely flow of SOE information. - Ongoing technical assistance (IMF, CAPTAC-DR, FAD, World Bank) to improve national accounts, producer/export/import price indices, government finance statistics, and public accounting (IPSAS implementation). - The source includes a visual growth-accounting comparison across the periods 1990-1999, 2000-2009, 2010-2019, and 2019-2025P, and a sectoral productivity and employment chart (100 = aggregate labor productivity). *Source: PANAMA — STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (as provided).* ### 2005. The authorities have started using the aggregate housing price index, collected by a contractor. ### 1panea2020001 - 2005. The authorities have started using the aggregate housing price index, collected by a contractor. ### Data gaps and financial sector indicators - Authorities have started using the aggregate housing price index, collected by a contractor. - Data gaps prevent deeper analysis of systemic risks: - No adequate data on commercial real estate prices. - No adequate data on loan write-offs. - No adequate data on loan-to-value ratios. - No adequate data on leverage indicators for households and corporate. - No mechanism to monitor debtor’s income and value of the acquired property objects after the loan has been granted. - Panama reports several Financial Access Survey (FAS) series indicators, including: - Commercial bank branches per 100,000 adults. - ATMs per 100,000 adults. - These two indicators are adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). ### Balance of payments and external sector data quality - Quarterly balance of payments (BOP) data are available with a delay of about one quarter and are subject to revisions thereafter. - Revised estimates in key trade and investment data may result in substantial revisions of the current account of the balance of payments. - In most cases revisions are not documented in national publications. - Limitations noted: - Data on outward FDI and repatriation of profit and dividends from these investments are only collected from the financial private sector. - Current account deficit and the International Investment Position (IIP) are likely being overestimated due to lack of coverage of outward FDI of the nonfinancial private sector. - Official statistics may underestimate inward portfolio investment. - International survey participation and compilation: - The Coordinated Direct Investment Survey (CDIS) and the Coordinated Portfolio Investment Survey (CPIS) are conducted timely. - Quarterly IIP data compiled since 2002; annual data available since 1998. - Panama recently began publishing BOP and IIP data in the BPM6 format. ### Data standards and dissemination - Panama has participated in the Fund’s General Data Dissemination System (GDDS) since December 2000. - A data ROSC was published in October 2006. - With STA assistance, in October 2018 Panama implemented recommendations of the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing critical data through the National Summary Data Page (NSDP). ### Latest developments (as reported) - Economic activity in 2019: - Real GDP growth outturn in 2019 was 3.0 percent, lower than staff’s estimate of 3.5 percent, due to unexpected weaknesses in non-mining sectors (mainly construction and commerce) in the last quarter. - Inflation: - Inflation returned to zero (y/y) in February 2020 after an uptick in January 2020. - Current account: - The external current account deficit in 2019 was 5.2 percent of GDP, lower than the estimate of 6.6 percent of GDP, driven by lower oil imports and stronger export performance from the Colon free trade zone. - Report date: March 17, 2020. ### Outlook and risks (staff assessment) - Revised baseline projections reflect COVID-19 shock and a downward revision: - Real GDP projection for 2020 downgraded by ¾ of a point to 4 percent in 2020, recovering thereafter. - Balance of risks tilted to the downside due to: - Stronger-than-anticipated impact of coronavirus on world economy. - Disruptions to supply chains, international trade, tourism, transportation, and financial market conditions. - Historical oil price declines and significantly increased global uncertainty with potential repercussions on international investment and financial stability. ### Policy advice (staff recommendations) - The new information does not alter the thrust of the staff appraisal. - Fiscal policy guidance: - Authorities should aim to adhere to the fiscal responsibility rule with some reorientation and reprioritization of spending to satisfy higher demands on the public health system. - If greater risks continue materializing, temporary deviations from the rule to use more fiscal space may become necessary. ### Key projections and selected quantitative indicators (revised vs. staff report) - Real GDP growth (in percent): - Staff Report (SM/20/64): 3.5 (2019), 4.8 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025) - Revised projection: 3.0 (2019), 4.0 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025) - Difference: -0.5 (2019), -0.8 (2020), 0.0 (2021), 0.0 (2022), 0.0 (2023), 0.0 (2024), 0.0 (2025) - Inflation (CPI, eop, percent): - Staff Report: -0.1 (2019), 1.0 (2020), 2.0 (2021–2025) - Revised projection: -0.1 (2019), 1.0 (2020), 2.0 (2021–2025) - Difference: 0.0 for all years reported. - Fiscal balance (NFPS): - Staff Report and Revised projection both: -3.1 (2019), -2.7 (2020), -2.5 (2021), -2.0 (2022–2025) - Difference: 0.0 for all years reported. - Public debt (NFPS, gross): - Staff Report: 40.8 (2019), 41.5 (2020), 41.5 (2021), 40.7 (2022), 40.0 (2023), 39.4 (2024), 38.7 (2025) - Revised projection: 41.0 (2019), 42.1 (2020), 42.1 (2021), 41.4 (2022), 40.8 (2023), 40.1 (2024), 39.5 (2025) - Difference: 0.2 (2019), 0.6 (2020), 0.6 (2021), 0.7 (2022), 0.8 (2023), 0.7 (2024), 0.8 (2025) - External current account (percent of GDP): - Staff Report: -6.6 (2019), -6.4 (2020), -6.2 (2021), -5.9 (2022), -5.3 (2023), -4.8 (2024), -4.8 (2025) - Revised projection: -5.2 (2019), -6.1 (2020), -5.9 (2021), -5.7 (2022), -5.2 (2023), -4.7 (2024), -4.7 (2025) - Difference: 1.4 (2019), 0.3 (2020), 0.3 (2021), 0.2 (2022), 0.1 (2023), 0.1 (2024), 0.1 (2025) ### Selected economic and social indicators (revised) - Population (millions, 2018): 4.2 - Poverty line (percent, 2017): 20.7 - Population growth rate (percent, 2018): 1.6 - Adult literacy rate (percent, 2018): 95.4 - Life expectancy at birth (years, 2017): 78.1 - GDP per capita (US$, 2018): 15,507 - Total unemployment rate (August, 2019): 7.1 - IMF Quota (SDR, million): 376.8 - Selected datapoints (revised projections, percent change or percent of GDP where indicated): - Real GDP (2007 prices): 3.0 (2019), 4.0 (2020), 5.0 (2021–2025) - Consumer price index (end-of-year): -0.1 (2019), 1.0 (2020), 2.0 (2021–2025) - External current account: -5.2 (2019), -6.1 (2020), -5.9 (2021), -5.7 (2022), -5.2 (2023), -4.7 (2024), -4.7 (2025) - Net foreign direct investment inflows (percent of GDP): 7.3 (2015), 7.9 (2016), 6.9 (2017), 7.9 (2018), 6.3 (2019) - GDP (in millions of US$): 54,092 (2015), 57,908 (2016), 62,219 (2017), 65,128 (2018), 66,801 (2019), 69,850 (2020), 74,443 (2021), 79,729 (2022), 85,389 (2023), 91,452 (2024), 97,945 (2025) *Prepared By Western Hemisphere Department (supplementary information to staff report, March 17, 2020).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1panea2020001.pdf_