## 1panea2020002

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### Fiscal context, deficits, and public debt
- Fiscal rule: Social Fiscal Responsibility Law (SFRL) anchored at an indicative net debt to GDP target of 40 percent; operationalized through a limit on the deficit of the non-financial public sector (NFPS).
- Authorities stabilized the deficit at 3.1 percent of GDP in 2019; SFRL amendment (October 2019) would have permitted a deficit up to 3.5 percent of GDP but authorities stayed below the ceiling.
- SFRL planned gradual tightening: deficit ceilings of 2.75 percent of GDP in 2020, 2.5 percent in 2021 and 2.0 percent from 2022 onwards.
- NFPS overall deficit averaged 2½ percent of GDP during the last 5 years.
- Gross debt of the NFPS rose to 40.8 percent of GDP in 2019.
- Market access and spreads:
  - EMBIG of 114 basis points in December 2019.
  - April 2019: US$1.0 billion Treasury Notes at a spread of 140 basis points (7-year maturity).
  - End-November 2019: US$1.3 billion in Global Bonds (2030 and 2053) at spreads of 105 and 135 basis points.
- Rating action: Fitch revised to negative outlook in February 2020 citing downside risks amid rising public debt.

### Revenue composition, tax performance, and policy challenges
- Tax revenue:
  - Averaged 9½ percent of GDP between 2014 and 2018.
  - Fell to 8.2 percent of GDP in 2019.
- Canal contributions reached 2.6 percent of GDP in 2019 and are expected to decline as a percent of GDP as Panama’s GDP grows faster than world trade.
- Non-tax revenue partially compensates but also declined in 2019.
- Main tax administration weaknesses: governance, internal controls, IT infrastructure, information and risk management, auditing capacity, tax compliance program.
- VAT and tax expenditures:
  - Tax expenditure in 2016: around 3.6 percent of GDP (about 1/3 of total tax revenue).
  - Panama raised on average 2.5 percent of GDP through VAT in the past five years; LAC average 6.3 percent of GDP; OECD average 6.7 percent of GDP.
  - OECD estimates Panama collects 62 percent of the VAT’s potential revenue.
  - Staff estimates measures limiting VAT tax expenditure and including services provided from abroad could increase revenue by about ½ percent of GDP.
- Corporate taxation and incentives:
  - Corporate income tax: territorial system, relatively low rates and widespread exemptions/incentives.
  - Recommendation: cost-benefit analysis of tax incentives and ensure compliance with exemption conditions.

### Policy recommendations on revenue and tax administration
- Upgrade governance, institutional capacity and human capital of the tax and customs administration.
- Strengthen compliance with tax obligations and re-establish a Large Taxpayer Unit.
- Improve customs controls and tax arrears collection (avoid frequent tax amnesties).
- Review and streamline tax exemptions (especially VAT, CIT) and consider possible increases in VAT and environmental taxes.
- Combine environmental tax increases with social spending to limit impact on poorer households.

### Fiscal impact of mining and resource taxation
- Concession and legal uncertainty:
  - Concessions granted to Minera Panama through Law No. 9 of 1997; declared unconstitutional by the supreme court in late 2018; uncertainty unresolved though production started mid-2019.
- Fiscal terms under special contract with Minera Panama:
  - Royalty: 2 percent on “Negotiable Gross Production” (gross amount after deduction of smelting costs, penalties, transportation costs, insurances and other transfer costs).
  - Land rental tax: US$3.00 per hectare per year (less than US$41 thousand a year).
  - Corporate income tax: 25 percent on taxable earnings, with exemption during period of outstanding construction/development debt.
- Effective tax rate estimates:
  - IMF FARI framework suggests Average Effective Tax Rate (AETR) is 26 percent and falls to 2 percent once tax credits and tax holidays are considered.
  - Panama’s fiscal regime for copper mining is relatively generous among copper-producing countries.
- Mining policy options:
  - Resolve legal uncertainty from nullified Law No. 9.
  - Develop technical and administrative capacity to supervise, monitor and tax the mining sector.

### Expenditure composition, efficiency, and public financial management
- Expenditure shares (2018): current primary spending accounted for 66 percent of total central government expenditure; capital spending 34 percent (down from 44 percent five years earlier).
- Drivers of higher wage bill: higher public sector wages including teacher salary increases agreed in 2014 (about 2/3 of the higher wage bill).
- Example of poor targeting: 2019 electricity subsidy cost around US$218 million (0.3 percent of GDP) covering 99 percent of consumers instead of targeting vulnerable households.
- Policy options on expenditure:
  - Undertake an expenditure review (e.g., PIMA for infrastructure governance).
  - Strengthen budget and expenditure controls; improve targeting and rationale for transfers and subsidies.
  - Slow down wage growth and link pay to productivity to create room for social spending.

### Fiscal framework, buffers, transparency, and fiscal risks
- Fiscal buffers:
  - Suggestion to accumulate fiscal buffers (self-imposed “shadow fiscal rule”) rather than widening primary balance; note: maintain NFPS primary balance at -0.15 percent of GDP after 2022 in the note’s scenario.
  - By 2025, under the baseline scenario the fiscal buffer could reach a ¼ percent of GDP and continue to grow.
- Fiscal Council:
  - Independent Fiscal Council (FC) law approved: three independent professionals, 7–year term, supported by technical secretariat in the Ministry of Economy and Finance; FC to issue non-binding opinions including cyclically adjusted deficit estimates.
- Reporting and contracts:
  - Turnkey contracts complicate fiscal statistical reporting; recommend reviewing and phasing out turnkey contracts.
  - Institutional coverage limited: Tocumen International Airport, ETESA, ENA not part of NFPS; Panama Canal accounts not consolidated with government accounts.
  - Recommendation: prepare consolidated NFPS accounts per GFSM 2014 and adopt best-practice accounting methods.
- Fiscal risks and pensions:
  - Unfunded pension liabilities: actuarial assessment suggests public pension system reserves deplete by 2035 without parametric reforms; old defined benefit subsystem’s reserves estimated to deplete by 2027.
  - Policy options: enhance fiscal risk analysis capacity, publish fiscal risks reports regularly, and reform public pension system.

### AML/CFT vulnerabilities, reforms, and FATF grey-list implications
- Vulnerabilities: money laundering from drug trafficking and predicate crimes abroad; weak supervision in corporate sector and FTZs; FT risks shifted from “low” to “medium” in preliminary assessment update.
- FATF status: placed on FATF grey list after June 2019 plenary for lack of compliance on 9 of 11 immediate outcomes; ICRG monitoring ongoing.
- Recent legal and institutional reforms (2019–2020) enacted or initiated include:
  - Law 70 (January 31, 2019) criminalizing tax evasion and laundering of tax evasion proceeds (threshold US$300,000).
  - Resolution 002-2019 (April 11, 2019) strengthening due diligence on financial transactions.
  - Anonymous reporting platform (May 16, 2019) generating 43 reports to date.
  - Law 87 (October 2019) amending criminal penalties for repeat tax offenders (exemption from jail if amount returned during investigation and ≤ US$300,000).
  - Law 123 (December 31, 2019) criminalizing unlicensed money remitters (imprisonment 5 to 8 years).
  - Law 124 (January 7, 2020) creating Superintendence of Non-Financial Entities.
  - Executive Decree 905 (September 20, 2019): suspend delinquent corporations from public registry (381,000 suspended in January 2020 out of 776,000 registered companies).
  - Law 169 (February 20, 2020) creating single registry for beneficial owners.
  - Planned AML unit in customs and blockchain adoption for Colon FTZ (forthcoming in 2020).
- Remaining gaps and priorities to exit grey list:
  - Strengthen CDD obligations of resident agents; subject reporting entities to Law 23.
  - Demonstrate operational criminalization of tax evasion and judicial capacity for investigation/prosecution within tight timelines.
  - Ensure beneficial ownership registry is fully operational and collects required information.
  - Dissolve or regularize dormant entities (381,000 suspended is a decisive step).
  - Improve AML/CFT statistics and inter-agency information sharing.
- Macroeconomic risk of remaining on grey list: potential severing of bank relationships, drying up foreign credit, limit domestic lending, squeeze bank margins, increase credit risk and damp economic activity.

### Financial sector structure, Basel III adoption, and prudential recommendations
- Banking center structure (as of November 2019):
  - 79 banks: 46 onshore, 33 offshore.
  - Onshore banks account for 86 percent of banking center’s assets, hold 87 percent of deposits and 88 percent of credit portfolio.
  - Offshore funding: 97 percent non-financial private sector, 3 percent banks.
  - Offshore assets: loans to non-residents 50 percent, interbank deposits abroad 28 percent, foreign securities 22 percent.
- Household and corporate indebtedness (2014–2019):
  - Household indebtedness to banks rose from 35 to 42 percent of GDP.
  - Firms’ loan obligations declined from 42 to 40 percent of GDP.
- Basel III adoption (phased in by January 2019):
  - Common Tier I minimum: 4.5 percent of RWA.
  - Tier I minimum: 6 percent of RWA.
  - Total capital minimum: 8 percent of RWA.
  - Leverage ratio: 3 percent.
  - CCoB (2.5 percent) and CCyB (0–2.5 percent) not yet included.
- Liquidity standards:
  - LCR introduced with gradual phasing (applicable at 50–100 percent individually per bank); full roll-in planned by end of 2022.
  - NSFR not yet considered.
- Macroprudential toolkit and recommendations:
  - Use dynamic provisioning (DPR) and leverage ratio flexibly; DPR parameters: α = 1.50 percent, β = 5.00 percent; DPR should be within 1.25–2.5 percent of RWA for normal loan portfolio.
  - Consider HLA surcharge for D-SIBs (analysis suggests D-SIBs could absorb an additional capital buffer of 2.5 percent of RWA).
  - Consider adoption of CCoB and CCyB over time.
  - Enhance stress-testing (more extreme shocks, cross-border failures) and implement ICAAP and top-down/top-down liquidity stress tests.
- Financial safety nets and resolution:
  - No explicit Deposit Insurance Scheme (DIS); Panama is one of 26 countries without a DIS.
  - National Liquidity Fund initial size discussion: perhaps US$500 million.
  - Recommendations: design DIS with risk-adjusted premiums, strengthen bank resolution framework, clarify SBP resolution powers, and involve MEF in FCC and crisis backstop roles.

### Housing, mortgage lending, macroprudential surveillance, and sectoral tools
- Residential price dynamics (Numbeo and other sources):
  - Price-to-income ratio rose by 52 percent (2012–2019); price-to-rent rose by 34 percent over same period.
  - Average dwelling sales price surged 21 percent from 2015 to 2017 in Panama’s metropolitan area.
  - Household exposure to mortgage debt rose to 96 percent of income in 2019 (Numbeo).
- Mortgage lending:
  - Commercial banks’ residential mortgage loans grew at average annual rate of 11.7 percent (2012–2019).
  - Share of residential mortgage loans to total loans increased from 28 percent to 34.5 percent (2012–2019).
  - Mortgage rate increased to 5.81 percent in 2019 from 5.56 percent in 2018.
- Model findings and hypothesis tests:
  - Residential property price-to-income predictor (Q4-2013 to Q4-2018) out-of-sample: average difference actual vs predicted in Q1-2019 to Q2-2019 around 1.5 percentage points (2.4 standard deviations); tests reject equality at 5 percent in Q1-2019 and Q2-2019.
  - Mortgage loan growth predictor: observed growth 5.3 percent (Y/Y) in Q2-2019 vs predictor 3.4 percent (Y/Y); deviations in Q1 and Q2 2019 not statistically significant at 5 percent.
- Macroprudential measures and sectoral tools:
  - Existing sectoral capital requirements (effective July 1, 2016) impose risk weights depending on LTV and appraisal recency (examples: 35 percent for main home LTV <80% with recent appraisal; up to 100 percent for other mortgages).
  - Recommended additions: limits on LTV, caps on DSTI or LTI ratios, tighter sectoral capital requirements, supervisory scrutiny and communication, intrusive supervision if underwriting weakens.
  - Guidance on policy sequencing: intensify supervision → tighten sectoral capital requirements → introduce LTV/DSTI limits if needed; apply LTV/DSTI to new loans only.
- Data gaps and surveillance needs:
  - No public nationwide real estate price index; need formal real property price indices, transaction data by foreigners, and granular LTV/DSTI/LTI statistics.

### Institutional governance, public administration, and social policy priorities
- Institutional weaknesses: low trust, weak judicial system (judicial independence ranked 129 of 141 countries), high rotation of officials, need for public administration professionalization.
- Public administration reforms:
  - Professionalize civil service, adopt results-based culture, improve transparency and phase out turnkey projects.
- Education and human capital:
  - Education spending among lowest in region; Panama ranked 71 of 77 in 2018 PISA.
  - Policy priorities: align curricula to private sector needs, teacher training, culturally appropriate education for indigenous communities, expand higher education and R&D.
- Social policies and poverty:
  - Extreme poverty dropped from 12.4 percent in 2000 to 2.5 percent in 2017; general poverty fell from 35.5 percent in 2000 to 14.1 percent in 2017.
  - National poverty rate 20.7 percent in 2017; poverty in comarcas 79.6 percent in 2017.
  - Key social programs: Red de Oportunidades, 120 a los 65 (US$120 per month), Beca Universal, Angel Guardian.
  - Presidential commitments: El Plan Colmena targeting 777,000 Panamanians in 300 corregimientos; Estudiar sin Hambre program.
- Climate and infrastructure:
  - Water losses estimated 40–48 percent in distribution; combined annual cost of extreme weather events estimated US$ 125 to 150 million (0.36% to 0.42% of GDP).
  - Electricity subsidy in 2019: US$193 million (0.3 percent of GDP); recommendation to phase-out general subsidy and improve targeting.

### Timing for reform and concluding policy priorities
- Opportune moment: new administration should pursue ambitious reforms to avoid middle-income trap and improve public service delivery.
- Top priorities highlighted across chapters:
  - Comprehensive reform of tax and customs administrations; review tax incentives and exemptions; consider broader tax policy reform.
  - Strengthen fiscal framework credibility: appoint Fiscal Council members, avoid further SFRL changes, fortify accountability and enforcement.
  - Improve PFM transparency: consolidated NFPS accounts, phase out turnkey contracts, publish fiscal risks.
  - Strengthen AML/CFT framework and exit FATF grey list through legal, institutional and operational reforms and effective implementation.
  - Fortify financial stability framework: adopt Basel III elements (CCoB, HLA for D-SIBs), expand macroprudential toolkit, establish DIS and improved resolution framework, involve MEF in crisis management.
  - Enhance data collection and surveillance for housing and financial stability (formal price indices, LTV/DSTI data).
  - Advance institutional reforms: judicial capacity, public administration professionalization, education and R&D investment, targeted poverty programs, climate adaptation.

*International Monetary Fund — Panama: Selected chapters and annexes (excerpts).*

### 1.   Higher Deficit Increased Public Debt ___________________________________________________ 5

### 1.   Higher Deficit Increased Public Debt

### A. Background and Fiscal Context
- Fiscal policy remains the main instrument for economic management in Panama as a fully dollarized economy with an open capital account, no central bank, no independent monetary policy and little use of macroprudential tools.
- Fiscal rule: Social Fiscal Responsibility Law (SFRL) anchored at an indicative target of net debt to GDP ratio of 40 percent, operationalized through a limit on the deficit of the non-financial public sector (NFPS).
- The rule was introduced in 2009; while it supported fiscal discipline and reduced debt, it can be prone to unintended pro-cyclicality of fiscal policy.
- Tax revenue amounted to 9½ percent of GDP on average between 2014 and 2018, compared to Central America average of 15 percent and Latin America peers average of 17½ percent.
- In 2019:
  - Tax revenue fell to 8.2 percent of GDP.
  - Canal contributions (toll fees and dividends) continued to grow, reaching 2.6 percent of GDP due to the expansion of the Panama Canal in 2016.
- Fiscal impulse is calculated as the change in the cyclically-adjusted primary balance of the NFPS (positive means fiscal loosening). (Figure referenced: fiscal impulse and output gap; public debt series)
- Authorities stabilized the deficit at 3.1 percent of GDP in 2019.
- SFRL amendment in October 2019 established new ceilings for the deficit of the NFPS; the revision would have permitted a deficit of up to 3.5 percent of GDP but the authorities stayed below the ceiling.
- The law foresees gradual tightening: deficit ceilings of 2.75 percent of GDP in 2020, 2.5 percent in 2021 and 2.0 percent from 2022 onwards.
- NFPS overall deficit averaged 2½ percent of GDP during the last 5 years.
- Gross debt of the NFPS rose to 40.8 percent of GDP in 2019 (after remaining well below 40 percent since introduction of the rule in 2009 until 2018).
- Panama accessed international capital markets at low spreads:
  - EMBIG of 114 basis points in December 2019.
  - April 2019: US$1.0 billion Treasury Notes under Panamanian law linked to Euroclear achieved a spread of 140 basis points at a 7-year maturity.
  - End-November 2019: US$1.3 billion in Global Bonds (a 2030 bond and a 2053 bond) at spreads of 105 and 135 basis points relative to respective U.S. instruments.
- Fitch Ratings revised to negative outlook in February 2020 citing downside risks amid rising public debt.

### B. Composition of Revenue and Expenditure (high-level findings)
- Non-tax revenue partially compensates for low tax revenue but also declined in 2019.
- Charted trends (figure references) show:
  - Expenditure components: Current primary spending, Accrued spending (staff adjustment for accrual of previously unrecorded expenditure), Capital spending, Interest (percent of GDP) across 2013–2019.
  - Revenue components (Central Government): Direct tax revenue, Indirect tax revenue, Non-tax revenue, Canal transfers (percent of GDP) across 2013–2019.
- Note: Canal transfers to the central government are expected to decline as a percent of GDP as the Panamanian economy is projected to grow at a faster rate than world trade.

### C. Revenue Measures and Tax Policy Challenges
- Low tax revenue limits space for financing development; to permit the state to provide public services appropriate for Panama’s income level, revenue levels will have to increase.
- Because non-tax revenue (mainly canal) grows at a slower rate than national GDP, most additional revenue will need to come from taxes.
- Weaknesses in tax policy and administration contribute to low tax revenue. Main areas of concern:
  - Governance
  - Internal controls (and vulnerabilities to corruption)
  - IT infrastructure
  - Information and risk management
  - Auditing capacity
  - Tax compliance program
- Electronic invoicing is being tested in a pilot but wider reforms are needed.
- Potential administrative reforms include:
  - Strengthening management of large taxpayers
  - Improving customs controls
  - Enforcing tax arrears collection instead of relying on frequent tax amnesties
- If cyclical recovery and tax administration reforms do not yield sufficient revenue, a comprehensive tax policy reform should be considered. The last reform occurred in 2009–14.
- Future reforms should rely on a mix of:
  - Curbed tax exemptions (especially VAT, CIT)
  - Increased compliance with tax obligations (especially for VAT, CIT, PIT)
  - Possibly some increases in tax rates (including VAT and environmental taxes)

### D. Tax Expenditure and VAT Observations
- Tax expenditure in 2016:
  - Accounted for around 3.6 percent of GDP.
  - Represented about ⅓ of total tax revenue collection.
  - The share of revenue is above the regional average of ¼.
  - VAT accounted for most of the tax expenditure.
- Review and streamline tax exemptions to simplify collection, curb inadequately targeted tax expenditures, and help reverse downward revenue trend without raising tax rates.
- VAT revenue:
  - Panama raised on average 2.5 percent of GDP through VAT receipts in the past five years.
  - Averages for LAC and OECD economies are 6.3 and 6.7 percent of GDP respectively.
  - OECD estimates Panama collects 62 percent of the VAT’s potential revenue.
  - Staff estimates that measures to limit VAT tax expenditure and inclusion of services provided from abroad in the tax base could increase revenue by about ½ percent of GDP.

### E. Corporate and Environmental Taxes
- Corporate tax (CIT) rates:
  - On par with LAC and advanced economy counterparts but among the lowest in Central America.
  - Panama’s tax system is based on a territorial principle, rates are relatively low, and exemptions and incentives are widespread.
  - Compared to Singapore: CIT tax rates in Panama are higher, but Singapore raised tax revenues of 14.1 percent of GDP in 2017 vs Panama’s 9.4 percent of GDP.
- Recommendation: Undertake cost-benefit analyses to assess whether tax incentives achieve desired outcomes; ensure firms comply with exemption conditions.
- Environmental taxes:
  - Selling price of gasoline and diesel in Panama is lower than the region.
  - A gradual increase in taxes on petrol consumption could incentivize investment in energy-efficient machinery and vehicles.
  - Environmental taxes should be combined with social spending to limit negative impact on consumption for poorer households.

### F. Policy Options (as listed in source)
- Upgrade governance, institutional capacity and human capital of the tax and customs administration to increase revenue collection.
- Strengthen compliance with tax obligations.
- Re-establish a Large Taxpayer Unit to better manage large taxpayers.
- Improve provision of public services, transparency and accountability to strengthen citizens’ willingness to pay taxes.
- Undertake a cost-benefit analysis of tax exemptions and incentives.
- Review tax rates, especially for VAT and environmental taxes.

*Source: FISCAL POLICY IN PANAMA: BACKGROUND, CHALLENGES AND POLICY OPTIONS (March 9, 2020).*

### 13.      The fiscal contribution of the new copper mine will be small. The government granted

### 13.      The fiscal contribution of the new copper mine will be small.

### Copper mine fiscal impact and legal uncertainty
- The government granted the concessions to Minera Panama through Law No. 9 of 1997, which was declared unconstitutional by the supreme court in late 2018.  
- The uncertainty relating to the legality of the large copper mine’s contract is still unresolved, but production has started as planned in mid-2019.  
- Given that copper production will become a significant contributor to the economy, it will be important to eliminate the uncertainty by reaching an agreement on this issue.

### Fiscal terms under the special contract with Minera Panama
- Royalty: 2 percent on the “Negotiable Gross Production”, defined as the gross amount received from the sale (of concentrates) after deduction of all smelting costs, penalties, transportation costs, insurances and other costs incurred in their transfer from the mine to the smelter.  
- Land rental tax: US$3.00 per hectare per year for the total concession area (less than US$41 thousand a year).  
- Corporate income tax: 25 percent on taxable earnings, with exemption for the period during which the Company has outstanding debt relating to the construction and development of the project (see NI 43-101 Technical Report 2019).

### Tax competitiveness and effective tax rates
- An estimate based on the IMF’s framework for Fiscal Analysis of Resource Industries (FARI) suggests that the Average Effective Tax Rate (AETR) is 26 percent and falls to 2 percent once tax credits and tax holidays are considered.  
- With this, Panama’s fiscal regime for copper mining is relatively generous among other copper-producing countries.

### Policy options (mining)
- Take action to remove the uncertainty created by the nullified Law No. 9.  
- Develop technical and administrative capacity to understand the complexity of the mining sector and be able to supervise, monitor and tax the sector.

### Expenditure composition and pressures
- In 2018, current primary spending (driven by wages and transfers and subsidies) accounted for 66 percent of total expenditure of the central government, up 10 percentage points from 5 years ago, as the share of capital spending went down to 34 from 44 percent, due to the deceleration of public infrastructure projects.  
- Roughly 2/3 of the higher wage bill is explained by higher public sector wages, including the increase in teacher salaries agreed in 2014.  
- The share of interest expense has been roughly stable.  
- Expenditure should be rebalanced to give sufficient space in the budget for public investment and social spending.

### Improving expenditure efficiency and public financial management
- Strengthening the public financial management system can help reduce current expenditure; unrecorded arrears and delays in subsidy payments highlight the need to improve budget and expenditure controls.  
- Timely payments to suppliers can reduce procurement costs.  
- The effectiveness of social and investment spending needs to be improved: project selection for investment spending and effective execution need to be strengthened; social spending is often not sufficiently targeted at the most vulnerable.  
- Example of efficiency loss: in 2019 the government spent around US$218 million (0.3 percent of GDP) on the electricity subsidy introduced in 2009 to prevent price increases for 99 percent of consumers instead of targeting the measures to more vulnerable members of society.

### Policy options (expenditure)
- Undertake an expenditure review (e.g. PIMA for infrastructure governance).  
- Strengthen budget and expenditure control.  
- Provide rationale for transfers and subsidies and ensure adequate targeting and effectiveness.  
- Slow down wage growth to create room for social spending and strengthen link between pay and productivity.

### Fiscal framework and buffers
- Accumulation of fiscal buffers could help reduce unintended pro-cyclicality of fiscal policy under the SFRL.  
- Over the medium term, as the debt to GDP ratio falls and taking advantage of the expected sustained period of low global interest rates, the average interest rate of the public debt portfolio will gradually lower and interest payments as a percent of GDP are expected to decrease.  
- Instead of widening the primary balance, the government could save this additional space as fiscal buffers under a self-imposed “shadow fiscal rule”.  
- The note indicates maintaining the primary balance of the NFPS at -0.15 percent of GDP after 2022. By 2025, under the baseline scenario the fiscal buffer could reach a ¼ percent of GDP and will continue to grow.  
- The shadow fiscal rule would not override the SFRL; successful implementation requires political commitment and effective communication.

### Fiscal Council and transparency
- The law creating an independent Fiscal Council (FC) was approved; the FC will comprise three independent professionals, appointed by the government on a 7–year term, supported by a technical secretariat in the Ministry of Economy and Finance.  
- The FC will evaluate macro-fiscal policy and issue a non-binding opinion, including assessment of fiscal plans and performance, and evaluation of macroeconomic and budgetary forecasts; it could estimate the cyclically adjusted deficit to facilitate decision-making on fiscal buffers.

### Policy options (fiscal framework)
- Appoint the members of the Fiscal Council and provide adequate resources.  
- Avoid further changes to the SFRL to protect the credibility of the fiscal framework.  
- Fortify the accountability framework and enforcement mechanisms for the SFRL.  
- Reduce fiscal policy pro–cyclicality, for example by accumulating buffers under a shadow fiscal rule.

### Fiscal reporting, turnkey contracts, and institutional coverage
- Use of turnkey contracts complicates fiscal statistical reporting because contractors obtain financing and expenditures are recognized only when payment is made upon completion; this permits separation of construction timing, liability recognition, and recording of expenditure, undermining transparency of fiscal commitments.  
- The continued use of the turnkey model is unclear given the government’s ample market access at favorable conditions.  
- Institutional coverage of the NFPS is limited in scope; three public enterprises are not part of the NFPS (Tocumen International Airport, ETESA, and ENA), and the Panama Canal accounts are not consolidated with government accounts, making assessment of the true fiscal position a challenge.  
- Efforts are ongoing by CAPTAC to assist with these issues.

### Policy options (reporting and contracts)
- Adopt best practices on accounting methods.  
- Review and phase out the use of turnkey contracts.  
- Prepare consolidated accounts of the NFPS according to international standards (GFSM 2014).

### Fiscal risks and pensions
- Sources of fiscal risks include unfunded pension liabilities, turnkey projects, contingent liabilities of public companies, extreme weather events (El Nino) and the sizable financial sector.  
- An actuarial assessment suggests that, without parametric reforms, the public pension system is projected to deplete its reserves by 2035; the old defined benefit subsystem’s reserves are estimated to deplete by 2027 and subsequently start generating fiscal pressures.

### Policy options (fiscal risks)
- Enhance capacity to analyze and mitigate fiscal risks.  
- Prepare and regularly publish a fiscal risks report.  
- Reform the public pension system.

### Concluding remarks and policy priorities
- Panama faces a choice between becoming an advanced economy or getting stuck in the middle-income trap; fiscal policy is central to improving delivery of public services and investment.  
- The beginning of a new administration provides a window to initiate ambitious reforms: comprehensive reform of tax and customs administrations, a review of tax incentives and exemptions, steps towards broader tax policy reform, and a review of the mineral taxation framework to ensure adequate tax revenue while encouraging investment and maintaining international competitiveness.  
- Important progress in administration reform, appointment of Fiscal Council members, adoption of best practice fiscal accounting and reporting methods, and comprehensive fiscal risk assessment and management are highlighted as priorities.

*INTERNATIONAL MONETARY FUND.*

### 1. Panama is vulnerable to money laundering (ML) from a number of sources including

### 1. Panama is vulnerable to money laundering (ML) from a number of sources including

### Overview and identified vulnerabilities
- Panama is vulnerable to money laundering (ML) from a number of sources including drug trafficking and other predicate crimes committed abroad such as fraud, financial and tax crimes.  
- It is a country with an open, dollarized economy which, as a regional and international financial and corporate services center, offers a wide range of offshore financial and commercial services.  
- The Panamanian financial platform has been under scrutiny, with criticism intensified following the inclusion of Panama in the grey list of the FATF in June 2014 and the document leak related to the Mossack-Fonseca scandal in April 2016.  
- Panama conducted a national ML/TF risk assessment in 2016; results fed into the 2017 national AML/CFT strategy (National Strategy to Combat Money Laundering, Terrorism Financing and Weapons of Mass Destruction Proliferation), supported by IMF technical assistance.  
- The Financial Analysis Unit Panama (UAF) is a member of the Egmont Group; Panama cooperates closely with GAFILAT and other relevant international supervisory bodies.  
- No specific cases of terrorist financing (FT) have been identified to date, but FATF assesses Panama as vulnerable to FT risks. Panama is a key transit hub attracting migratory flows; proximity to Colombia heightens FT concerns amid the recent reactivation of FARC and resurgence of armed conflict.  
- Preliminary conclusions of the risk assessment update (jointly with the World Bank) show FT risks shifting from “low” to “medium” in Panama, especially in the corporate sector, as transactions of medium and small companies operating in the FTZ lack adequate onsite supervision.  
- The Colon Free Trade Zone (FTZ), the second largest in the world, may be exposed to the passage of weapons or dual-use goods without appropriate regulations and surveillance mechanisms.

### Recent developments and FATF status
- Panama was placed on the FATF’s grey list for monitoring by the ICRG after the June 2019 plenary due to lack of compliance on 9 out of the 11 immediate outcomes on effectiveness; FATF designated Panama as a “jurisdiction with strategic deficiencies,” placing it under ICRG monitoring until major deficiencies are resolved and reassessed.  
- Panamanian authorities adopted an action plan committing to:  
  - Strengthen understanding of national and sectoral ML/TF risks and improve national policies to mitigate these risks;  
  - Proactively identify unlicensed money remitters, and ensure effective, proportionate, and dissuasive sanctions against AML/CFT violations;  
  - Ensure adequate verification and update of beneficial ownership information, establish an effective mechanism to monitor activities of offshore entities, assess risks of misuse of legal arrangements to define and implement measures to prevent misuse of nominee shareholders and directors, and ensure timely access to adequate and accurate beneficial ownership information;  
  - Ensure effective use of its Financial Intelligence Unit (FIU) for ML investigations, demonstrate ability to investigate and prosecute ML involving foreign tax crimes and provide constructive and timely international cooperation with such offences.  
- Exiting the FATF grey list is macro-critical: without policy action, bank relationships risk being severed, drying up foreign credit and limiting domestic lending, squeezing bank margins and increasing credit risk, damping economic activity with potentially long-lasting negative effects. Reputational damage if exiting the grey list protracts beyond targeted dates (after the February or June 2021 FATF plenary, as communicated in the press) can undermine reform capacity and political influence.  
- GAFILAT’s latest mutual evaluation report (MER) noted progress on technical compliance: four FATF recommendations can be rerated from “Partially Compliant” to “Compliant”, and seven more recommendations demonstrated “improvement of the technical compliance” albeit without rerating.

### Legal, institutional, and operational reforms (2019–2020)
- Chronological reforms and measures enacted or initiated include:  
  - Enacting Law 70 (January 31, 2019) criminalizing tax evasion and the laundering of tax evasion proceeds by adding it to the Criminal Code and modifying the Tax Code. When the tax office has information that in a calendar year an amount of US$300,000 or above has been evaded, the Tributary Administrative Court can be notified with appropriate evidence to file a criminal case through the prosecutor's office. Tax evasion is punishable with a prison sentence of between two and five years, and a financial penalty of between two and ten times the amount evaded.  
  - Passing resolution 002-2019 (April 11, 2019) imposing greater controls on financial transactions by strengthening due diligence to detect fiscal crimes (issued by the Superintendence of Banks of Panama).  
  - Launching an anonymous platform to report incidents of money laundering (May 16, 2019) by UAF and Crime Stoppers; platform generated 43 reports of suspicious activity to date.  
  - Passing amendment to the tax evasion legislature (Law 87 of October 2019 modifying article 288-J of the Criminal Code) introducing criminal punishment for repeat tax offenders; amendment aimed at corporations and other legal entities and grants exemptions from jail time only if the defrauded amount is returned during the investigation phase and if it does not exceed US$300,000.  
  - Signing a statement of intent with France (November 28, 2019) to create a working group to cooperate on fiscal and financial transparency and AML/CFT measures; agreement focuses on adoption of more efficient mechanisms for exchange of fiscal information.  
  - Introducing criminal penalties for unlicensed money remitters (Law 123 passed on December 31, 2019), including imprisonment from 5 to 8 years.  
  - Creating the Superintendence of Non-Financial Entities (Law 124 passed on January 7, 2020) to strengthen supervision of non-financial businesses and professions (notably FTZs, lawyers, construction and real estate companies); agency conducts training and onsite inspections.  
  - Suspending delinquent corporations from public registry (Executive Decree 905 of September 20, 2019): In January 2020, 381,000 legal entities were reportedly suspended from the public registry of Panama (out of a total of 776,000 registered companies) for failing to pay their fees for three consecutive years or not having a resident agent and will be permanently dissolved if their status is not regularized within 90 days.  
  - Approving creation of a single registry for beneficial owners (Law 169 passed on February 20, 2020) to enhance transparency and traceability of ultimate beneficiary ownership data for legal entities established in Panama.  
  - Proposing a law requiring resident agents to obtain and maintain financial statements of companies established in Panama but operating abroad, and to submit these accounting records to fiscal authorities upon request (modifying Law 52 of 2016). The Ministry of Economy and Finance acknowledged on January 8, 2020 that in practice no such data are provided despite agreements.  
  - Establishing an AML unit within the customs administration (forthcoming in 2020) with compliance officers trained to perform due diligence on suspicious transactions; customs plans to move away from cash payments to digital transactions for enhanced traceability.  
  - Adopting blockchain technology to enhance transaction reporting for goods passing through the Colon FTZ (forthcoming in 2020) to reduce FT risk (effort led by customs administration).  
- Despite intensified policy dialogue, France communicated its decision to keep Panama on its list of 13 "tax havens" in January 2020.

### Policy priorities and remaining gaps
- Strategic priorities: design and implement a formal communication strategy to:  
  - Ensure authorities’ commitment to address FATF’s areas of concern is widely acknowledged;  
  - Continuously update GAFILAT and all relevant parties of changes to the AML/CFT national strategy or legal framework in a timely manner;  
  - Appraise domestic agents of any applicable changes.  
- Technical priorities: create a taskforce and a roadmap for necessary reforms with expert assistance (including IMF).  
- Key effectiveness gaps noted by GAFILAT’s MER (January 2018 and follow-ups): Panama’s AML/CFT framework is only effective (“substantial”) in two areas (preventive measures and financial sanctions related to terrorism financing and proliferation financing). In all other areas GAFILAT deemed effectiveness to be insufficient (“moderate” or “low”), including: understanding of risk, international compliance, supervision, preventive measures, transparency of legal persons and legal arrangements, financial intelligence, money laundering investigations and prosecution, confiscation, and terrorism financing investigations and prosecution.  
- Specific priorities to exit the grey list and meet international standards:  
  - Strengthening customer due diligence (CDD) obligations of resident agents; amending Law 2 to remove legal ambiguity and subject all reporting entities, including resident agents, to Law 23 (comprehensive AML Law 23 of 2015 clarifies CDD obligations).  
  - Demonstrating the ability to criminalize tax evasion operationally—either by providing disclosures that proper taxes are filed and paid, or by supplying copies of tax returns to relevant financial institutions (subject to approval by GAFILAT). Judicial system must develop capacity to investigate and prosecute identified tax evasion cases within a relatively tight timeline.  
  - Enhancing data transparency on beneficial ownership, building on Law 169; previously only information on beneficial owners controlling 25 percent or more of an entity were required by law. Under the new law, resident agents are required to provide beneficial ownership information for all legal entities registered in Panama. Authorities must demonstrate that the ownership registry is fully operational and adequately collects the required information to meet compliance thresholds.  
  - Dissolving or regularizing the large number of dormant entities to improve transparency of ownership information for CDD purposes; the removal of 381,000 dormant entities from the public registry is a decisive step.  
  - Improving AML/CFT statistics and information sharing: fragmented oversight means relevant data are not always shared in a timely manner among agencies and with third parties; roundtables (mesas de trabajo) for AML/CFT cross-agency cooperation aim to improve timeliness and accuracy.

### Conclusions and recommendations
- The newly-formed government needs to prioritize strengthening Panama’s AML/CFT regime and enhancing its financial integrity to maintain competitiveness. Building on recent legal initiatives, authorities should prioritize addressing remaining shortfalls of the legal framework, particularly given the FATF grey listing. Short-run urgent action is required to address FATF’s recommendations outlined in the June 2019 action plan.  
- Beyond technical compliance, authorities must focus on enhancing effective implementation of the legal framework and an accompanying communication strategy. Addressing effectiveness deficiencies will be more challenging and time-consuming, requiring capacity building, enhanced inter-agency coordination, continuous education of reporting agencies and the public, and international cooperation. Improvements will help meet financial integrity objectives and boost Panama’s international standing.  
- Recent initiatives—legislative actions and other reforms—demonstrate the new administration is committed to exit the FATF watchlist promptly, scaling up regulatory measures, improving cross-agency coordination and information sharing, and building capacity and public awareness to better control financial transactions and the passage of goods through the country.

*Prepared by Marina Rousset (WHD) in close collaboration with Francisco Figueroa (LEG).*

### References

### References

### Overview of Panama’s financial system and recent trends
- Panama is a small and fully dollarized economy that positions itself as an international banking center of Latin America; banks hold assets double the size of its GDP.
- As of November 2019, Panama hosted 79 banks.
- The 46 onshore banks (general license) form the domestic banking system: they amount to 86 percent of the entire banking center’s assets, holding 87 percent of the deposits and 88 percent of the credit portfolio.
- Of the 33 offshore banks: 22 hold an international license (IL) and 11 have a representative license (RL).
- Offshore banks’ external funding is almost all from the non-financial private sector (97 percent) and 3 percent from banks.
- Offshore assets composition: loans to non-residents 50 percent, interbank deposits abroad 28 percent, foreign securities 22 percent.
- From January 2014 to November 2019, the number of banks declined from 91 to 79 (net change figures by category shown in source tables).
- In 2019, the seven largest onshore banks held about 65 percent of the total banking system’s assets (up from 62 percent in 2015).
- The financial center contributes around 7 percent of GDP every year.
- Banks’ lending portfolio constitutes 2/3 of total assets, with 80 percent of liabilities coming from deposits. Tradeable securities: about 2/5 corporate bonds and 3/5 public sector bonds.
- From 2014 to 2019: household indebtedness to banks rose from 35 to 42 percent of GDP; loan obligations of firms declined from 42 to 40 percent of GDP.
- Comparative household debt examples in the source: Singapore 54.2 percent of GDP; Hong Kong SAR 72.2 percent of GDP.

### Financial stability oversight and prudential framework — current practices and enhancements
- The Superintendency of Banks of Panama (SBP) has a broad regulatory framework covering asset classification, capital adequacy, market risk, corporate governance, external auditors, mergers/acquisitions, and ML/FT prevention.
- Since 2002, SBP reports international assets and liabilities statistics to the BIS in Basel.
- SBP publishes the annual Financial Stability Report (FSR) and monthly updates.
- Systemic risk oversight tools:
  - Financial Stability Map (FSM) measuring five types of risks (macro, external, credit, solvency/profitability, liquidity) with quarterly indicators; risk score from 1 to 9 (baseline 2010-15).
  - CAMELS-like rating system for groups of banks, using indicators including capital adequacy (share of tier 1 capital to total capital and capital adequacy ratio), asset quality (coverage of NPLs by provisions and growth of NPLs), management income, earnings (ROA), liquidity, financial strength, credit risk, market risk.
- SBP identified nine D-SIBs: three presenting the highest systemic risks, four medium, two least systemic.
  - The SBP methodology considers license type, size relative to GDP, substitutability, interconnection, inter-jurisdictional activity, and complexity.
  - Recommendations to align with Basel: (i) publish the D-SIBs methodology; (ii) make the list and ranking public and update at least annually; (iii) implement higher loss absorbency (HLA) requirement (in percent of the RWA, to be met with tier I capital).
  - Given D-SIBs’ asset range from 6 to 25 percent of GDP, consider a more granular ranking scale (e.g., five buckets).
- Stress testing practices:
  - SBP conducts stress tests to credit portfolio and capital adequacy using regression and balance sheet approaches with IMF TA.
  - Tests consider baseline, moderate, and severe scenarios, applied to the whole system and individual banks/groups.
  - Results show banks would remain adequate even under severe macroeconomic and interest rate shocks.
  - Suggested enhancements: (i) consider more extreme shocks (e.g., prolonged recovery), cross-border bank failures, distress in financial groups; (ii) develop top-down liquidity stress-tests; (iii) implement bottom-up internal capital adequacy assessment process (ICAAP) requiring banks’ independent stress-tests to compare with SBP top-down results.
- Monitoring household and firm indebtedness and real estate:
  - SBP monitors price index of new housing (VNPI) and monthly index of construction activity (IMACO).
  - VNPI uses data collected by La Galería Inmobiliaria.
  - In 2018, aggregate house price index continued to grow at lower rates; IMACO shows the construction sector is shrinking.
  - Critical to monitor loan exposure to the construction sector.

### Adoption of Basel standards and policy recommendations
- Panama has progressed in aligning SBP regulatory practices with the Basel Core Principles (BCPs): in 2011 Panama was fully compliant on 17 of 25 principles (compared to 9 in 2001).
- Law 2-2008 enhanced SBP powers: more flexible and comprehensive bank resolution process, extended supervisory authority to holding companies and affiliates, explicit authority over group perimeter and affiliate identification.
- Progress since 2011 includes adoption of capital requirements on operational risk and updated capital adequacy framework; some 2011 issues remain unresolved:
  - (i) lack of regulation on the interest rate in the banking book (SBP ready to adopt in 2020);
  - (ii) lack of guidance on transfer risk;
  - (iii) dependence of the superintendent’s term on the political cycle.
- Basel Core Principles list now includes 29 criteria; assessment based on latest metrics is not available. Example: Rules 5-2015 and 8-2019 updated corporate governance but assessment is not available.
- Basel III overview and potential macroeconomic impact:
  - Basel III requires higher capitalization and liquidity; proportional implementation is allowed for emerging markets.
  - OECD estimate cited: implementation of Basel III could increase lending costs on average by 15 basis points due to updated minimum capital requirement and by 50 basis points after adoption of the capital conservation buffer (CCoB).
  - Slovik and Cournède (2011) estimate that in advanced economies such an increase in interest rates could lower growth by 0.05-0.15 percentage points per annum.
- Panama’s adoption of Basel III standards:
  - Panama partially adopted Basel III on capital adequacy (Basel Core Principle 16).
  - Rules 1-2015 and 13-2015, phased in by January 2019, increased minimum capital requirement to:
    - common Tier I capital: 4.5 percent of RWA
    - Tier I capital: 6 percent of RWA
    - total capital: 8 percent of RWA
  - Leverage ratio limited to 3 percent.
  - Current capital adequacy regulations do not include the CCoB (2.5 percent of common equity) nor a countercyclical buffer (CCyB).
- SBP considerations and recommendations:
  - Adopt the CCoB for all banks (included in SBP strategic plan).
  - Adopt HLA capital surcharge for D-SIBs; analysis shows D-SIBs could absorb an additional capital buffer of 2.5 percent of RWA (assessment caveat: does not consider market and operational risk charges nor simultaneous CCoB introduction).
  - Consider feasibility of adopting the CCyB in future.

### Key statistics and exact regulatory figures (as presented)
- Banks hosted as of November 2019: 79.
- Onshore banks: 46; offshore banks: 33.
- Onshore banks share of banking center’s assets: 86 percent.
- Onshore banks hold 87 percent of deposits and 88 percent of the credit portfolio.
- Offshore funding composition: 97 percent non-financial private sector, 3 percent banks.
- Offshore assets composition: loans to non-residents 50 percent, interbank deposits abroad 28 percent, foreign securities 22 percent.
- Seven largest onshore banks held about 65 percent of total banking system’s assets in 2019 (62 percent in 2015).
- Household indebtedness to banks: rose from 35 to 42 percent of GDP (2014–2019).
- Firms’ loan obligations: declined from 42 to 40 percent of GDP (2014–2019).
- Residential debt comparators noted: Singapore 54.2 percent of GDP; Hong Kong SAR 72.2 percent of GDP.
- VNPI and IMACO monitored indicators (indices and time series referenced in text and charts).
- Basel III minimum capital requirements phased in by January 2019:
  - common Tier I capital minimum: 4.5 percent of RWA
  - Tier I capital minimum: 6 percent of RWA
  - total capital minimum: 8 percent of RWA
- Leverage ratio requirement: 3 percent.
- Capital Conservation Buffer (CCoB) in Basel III: 2.5 percent of common equity (not yet included in Panama’s regulations).
- Suggested additional capital buffer for D-SIBs in analysis: 2.5 percent of RWA.

*Prepared by IMF staff; references and source tables as listed in the original document.*

### 15. SBP advanced in revising its regulations to Basel III standards on the risk coverage.

### 1panea2020002 - 15. SBP advanced in revising its regulations to Basel III standards on the risk coverage.

### Risk coverage: key regulatory advances
- Credit and counterparty risk (BCP 17)
  - Rule 4-2013 established specific and dynamic provisioning on credit, and set rules to assess collateral value.
  - Dynamic provisioning is governed by a macroprudential motive and established on the normal portfolio; it has countercyclical capacity, but is not equivalent to the countercyclical capital buffer.
  - Rules 3-2016 and 8-2016 established the risk weights for different segments of banks' credit portfolio, in line with the latest standards of Basel III.
  - Mortgage loans and consumer loans (cars, individuals) had relevant changes in risk weights depending on maturity.
  - These rules determine how to evaluate collateral of different categories.
- Market risk (BCP 22)
  - Rule 11-2017 established typology of different derivative contracts, good practices in their management, and requirements of normalized capital according to the nature of the derivative, term and underlying.
  - Rule 3-2018 created capital requirements for financial instruments (bonds, securities, shares, forwards, swaps, options) registered in the trading book, and established restrictions on moving instruments between the books.
- Operational risk (BCP 25)
  - Rule 11-2018 established capital requirements on operational risk and standards for the operational risk management framework, including policies and processes to identify, assess, evaluate, monitor, report and control or mitigate operational risk on a timely basis.
- Country risk (BCP 21)
  - Rule 7-2018 prescribed the methodology to assess country risk and sets provisions on country risk management, dependent on the country risk classification set within this standard.
  - No guidance or provisions established on transfer risk.

### Basel III implementation status and numeric thresholds
- Capital adequacy (SBP Rules 1-2015)
  - Common tier 1 / RWA >4.5 percent of RWA
  - Total tier 1 capital / RWA >6 percent
  - (Tier 1 + Tier 2 capital) / RWA >8 percent
- Capital conservation buffer
  - Common equity / RWA = 2.5 percent — Planned for 2020-2021
- Countercyclical capital buffer
  - Common equity / RWA = 0-2.5 percent — N/A
- Leverage ratio (SBP Rule 1-2015)
  - Common tier 1 / total exposure to the non-RWA in and off-balance sheet >3
- Risk coverage
  - Credit risk, including counterparty credit risk: Rules 4-2013, 3-2016, 8-2016
  - Market risk: Rules 11-2017, 3-2018
  - Country risk: Rule 7-2018
  - Operational risk: Rule 4-2018
- Capital surcharge for D-SIBs
  - Considered
- Liquidity measures
  - Liquidity Coverage Ratio (LCR): High quality liquid assets / Net cash outflows in 30-day period >=1 — Gradually adopted
  - Net Stable Funding Ratio (NSFR): Amount of stable funding (ASF) / required amount of stable funding (RSF) >=1 — Need to consider

(Source: BIS, Superintendency of Banks)

### Adoption of Basel III liquidity standards
- LCR adoption and phasing
  - Rules 2-2018 and 4-2018 set a minimum LCR, define early warning indicators of liquidity distress, and require changes in treasury management and forecasting of inflows and outflows.
  - LCR is defined as high-quality liquid assets to the 30-day total net cash outflow.
  - LCR will be applicable at a rate of 50–100 percent, as determined individually for each bank, after a gradual phasing-in. This differs from Basel, which requires 100 percent when fully phased-in.
  - LCR full roll-in planned by the end of 2022.
- NSFR
  - The NSFR, which aims to reduce funding risks at the medium-term horizon, has not yet been considered; authorities should consider feasibility once LCR is fully rolled-in.

### Prudential framework and macroprudential toolkit
- SBP mandate and supervisory approach
  - Banking Law (Law 52-2008) mandates SBP to ensure soundness and efficiency of the banking system.
  - Microprudential supervision: risk-based, with on-site and off-site examinations.
  - Macroprudential supervision: establishes rules to prevent and mitigate systemic risk and increase resilience.
- Existing macroprudential tools
  - Broad-based tools:
    - Leverage ratio limit
    - Dynamic provisioning as set out in Rule 4-2013: should be within 1.25–2.5 percent of RWA corresponding to the normal loan portfolio, and cannot be lower than in the previous quarter, unless due to conversion of dynamic into specific provisions.
  - Sector-specific measures:
    - Capital requirements determined by risk weights, loan-to-value ratio (LTV), and collateral features (Rule 3-2016).
- Dynamic provisioning calculation (as provided)
  - DPR(t) = αL(t) + βmax{∆L(t), 0} - SP(t)
  - α = 1.50 percent
  - β = 5.00 percent
  - L(t) = RWA for loans classified under the normal category
  - SP(t) = variation in the balance of specific reserves
  - DPR is a capital account paid or credited to retained earnings; credited balance is part of regulatory capital but cannot be included in calculation to meet the regulatory minimum of 8 percent.

### Recommendations to strengthen macroprudential toolkit
- Use existing tools more flexibly
  - Stricter leverage ratio
  - Higher dynamic provisioning
  - Higher risk weights for certain loan types
- Consider adoption of new tools
  - Setting maximum LTV
    - Requires SBP to require banks to submit data on market value of real estate.
    - Historical bank self-insurance (limits on LTV, high presale requirements) helped contain construction exposure in the GFC.
  - Setting maximum debt-to-income (DTI) or debt-service-to-income (DSTI) ratios
    - SBP would need banks to periodically update borrower income and report DTI and/or DSTI.
    - Existing practice of automatic payroll deductions effectively limits debt service to 50 percent of household income; authorities could consider lower optimal DSTI if justified.

### Financial sector safety nets and bank resolution: emergency liquidity
- Liquidity vulnerabilities in a fully dollarized system without a central bank
  - Interbank deposits abroad are about 3 times larger than interbank deposits parked domestically.
  - BNP acts as fiscal agent and holds sizable reserves abroad.
  - Interbank markets can freeze due to high holdings abroad, segmentation, insufficient collateral.
  - Potential triggers: dry-up of international liquidity, loss of correspondent banking relationships, government arrears on preferential mortgage interest rate.
- Financial Stimulus Program (FSP) 2009 (limited success)
  - Aimed to provide liquidity of US$1.1 billion.
  - Funding composition:
    - BNP: US$400 million
    - Andean Development Corporation: US$210 million
    - Inter-American Development Bank: US$500 million
  - Managed by BNP through a trust; BLADEX assessed creditworthiness.
  - Banks did not draw much due to ample liquidity, unfavorable access conditions (relatively high borrowing cost and collateral requirements), and perception of “red tape”.
- National Liquidity Fund proposal
  - Discussions that initial size could be perhaps US$500 million, available only to non-systemic, solvent banks with general license.
  - Would operate as a discount window held in the BNP.
  - Would require legal changes to give BNP right to claim funds back in case of bankruptcy and changes to institutional arrangements and judicial powers.

### Deposit Insurance Scheme (DIS): considerations and design options
- Current status
  - Panama has managed bank failures without systemic disruption, but lacks an explicit DIS.
  - Article 167 of the Banking Law gives priority to new deposits during reorganization and deposits lower than US$ 10,000.
  - Panama is one of 26 countries worldwide without a DIS (per International Association of Deposit Insurers).
- Design modalities to consider
  - Deposit base for premium assessment (all deposits, only insured deposits, or sector-limited)
  - Coverage of foreign and inter-bank deposits
  - Existence and size of co-insurance
  - Structure of premiums (flat rate or risk-adjusted graduated rate) and their size (international practice: from 0.05 to 1.85 percent)
  - Voluntary vs. compulsory membership
  - Source of funding and administration (private, public, or joint)
  - Whether DIS participates in the resolution process
- Suggested approach for Panama
  - Consider a DIS funded by banks paying risk-adjusted premiums to limit excessive risk-taking.
  - Government could provide initial funds; the DIS would operate as autonomous once premiums accumulated sufficiently.
  - Example numeric illustration: at a rate 0.5 percent, during the first 10 years the DIS would gather only 5 percent of the deposit base (not adjusted for inflation).
- Main functions of DIS
  - Collect premiums, invest assets, pay insured deposits, and participate in crisis management.

### Bank resolution framework: gaps and recommended legal changes
- Identified shortcomings
  - Framework does not clarify objectives, triggers for intervention, and types of corrective measures.
  - Lacks a choice of robust resolution tools.
  - Limits SBP’s resolution powers.
  - Rights of shareholders are not suspended at any stage of the process.
  - Resolution processes may be lengthy, risking depositor access and asset value.
- Suggested components of a new Bank Resolution Law
  - Clearly define objectives and triggers for intervention, and types of corrective measures; include qualitative and quantitative indicators that are open-ended, flexible and forward-looking.
  - Provide a "menu" of robust resolution tools, e.g., modified framework for mergers, transfer of assets and liabilities tool, bridge bank tool, and forced recapitalization tool.
  - Give SBP powers to assume control of banks in resolution and establish a sanctioning regime (e.g., suspend voting rights, order sale of shares).
  - Establish a "sanctioning committee" as a special collegial decision-making body to deal with non-compliance and financial distress.
- Expected benefits
  - Shorten resolution process, protect asset value and claimants’ funds, improve efficiency, and reduce potential legal disputes—particularly in cases involving unfit shareholders.

### Regulatory coordination and the Financial Coordination Council (FCC)
- Current FCC role
  - Collegial body to facilitate information exchange and discuss planned regulations; not authorized to make decisions or set system-wide policies.
  - Established by Law 67-2011; coordinates actions of financial sector supervisors through bi-monthly meetings.
  - Board chaired by the Superintendent of Banks, includes five full members and two associate members.
  - Superintendencies of Banks, Securities Markets, and Insurance/Reinsurance serve on each other Boards of Directors.
- Options to enhance FCC
  - Move toward a more centralized supervisory structure (e.g., Financial Policy Committee model).
  - Expand FCC mandate with powers to:
    - Facilitate inter-agency exchange of information for crisis management and resolution
    - Supervise and assess systemic risks under hypothetical scenarios
    - Develop coordinated plans for crisis preparedness, management, and resolution activities in good times
    - Set macroprudential policies

*Source: BIS, Superintendency of Banks; INTERNATIONAL MONETARY FUND.*

### 28. The Ministry of Economy and Finance (MEF) should increase its role in the current

### 1panea2020002 - 28. The Ministry of Economy and Finance (MEF) should increase its role in the current

### Role of MEF in crisis management and resolution
- Currently, MEF does not participate in the FCC and does not have an assigned role in providing a public financial backstop to facilitate resolution.
- Recommendation: Bring MEF on Board of the FCC and clearly define its role in providing a public financial backstop to facilitate resolution.
- Note: Another potential full FCC member could be the Superintendency of the Non-Financial Entities (SNFE). The Ministry of Housing and the Ministry of Agricultural Development could become associate members; these two ministries oversee two non-deposit taking public development banks—the National Mortgage Bank (BHN), and the Agricultural Development Bank. The BHN supervises savings and credit associations.

### Consolidated supervision and structural risk limits
- Panama participates in regional coordination bodies—Association of Supervisors of Banks in Americas (ASBA), and the Central American Council of Superintendents of Banks, Insurers, and other Financial Institutions—to enhance monitoring of systemic risks and regional financial stability.
- The SBP coordinates closely with other banking supervisors within the region.
- Regulatory standards cited:
  - Rules 7-2014 and 2-2016 set standards for the consolidated supervision of banking groups.
  - Rules 6-2009, 5-2013, and 5-2016 restrict risk concentration for economic and banking groups and related parties.
  - Large exposures for banks are limited by 25 percent of consolidated capital for a single counterparty.

### Regulations for a more modern and inclusive financial system; fintech landscape
- Panama comparative advantages attracting fintech: high-speed internet, a significant number of internet users, low taxes, and lack of sectoral regulations.
- Panama participates in international online payment systems, cryptocurrency trade, and hosts initial coin offerings (ICO) by blockchain operators and cryptocurrency traders.
- Local banks have begun to:
  - Capitalize on fintech potential to reduce costs, increase efficiency and competition, and broaden access to underserved populations.
  - Roll out mobile wallet apps (e-wallets allow opening a simplified digital savings account, pay online and in shops with QR codes, and transfer money between cell phones).
- PanaFintech Association (established in 2017) promotes communication among fintech ecosystem actors and participates in the Ibero-America Fintech Alliance.
- Specific fintech developments and examples:
  - Derbit (large trader of bitcoin futures and options) announced its move from Netherlands to Panama in 2020.
  - Some local banks reportedly cooperate with fintech start-ups and facilitate trade of digital currencies.
- Digitalization and cybersecurity indicators:
  - Panama moved up to the 66th place in the United Nations E-government Development Index in 2018 (compared to the 114th rank in 2016).
  - In the Global Cybersecurity Index (GCI) Panama fell to 97th from 62nd place in 2018 compared to 2017.
  - Uruguay ranks the 3rd in the Americas after the USA and Canada in the GCI.
- Regulatory developments:
  - In 2018, authorities prepared a draft Bill for the Modernization of the International Financial System of Panama, but it was not finalized.
  - The government prioritizes developing a regulatory sandbox using best international practices.
- Suggested actions for fintech regulation:
  - Create a regulatory sandbox taking into account recommendations from supervisory bodies (examples cited: IMF (2020) Institutional Arrangements for Fintech Regulation and Supervision; IMF (2019) Regulation of Crypto-Assets).
  - Recognize that effective regulation of financial services promotes long-term economic stability and minimizes social costs and negative externalities from financial instability; same principles apply to crypto assets.
- Regional legislative examples:
  - Mexico enacted a comprehensive fintech law and complementary regulations, taking full effect in 2020.
  - Brazil issued regulation on crowdfunding and peer-to-peer lending and created a special congressional commission for a broader law.
  - Colombia and Argentina have set norms for crowdfunding while warning investors against cryptocurrencies.
  - Chile issued a white paper to set regulatory parameters focusing on crowdfunding, roboadvisory services, and payment systems.
  - Peru’s banking regulator issued a strategy on crowdfunding and payment systems.

### Key findings on housing, mortgage lending, and household indebtedness (from Annex material)
- Residential real estate prices have been rising in Panama City amid strong economic growth and foreign buyer interest; anecdotal evidence and private sector surveys indicate continued increase during the first half of 2019 (despite a brief moderation during the same period in 2018).
- Commercial banks’ residential mortgage lending grew by an average annual rate of 11.7 percent over the last 7 years.
- Household indebtedness increased: in Panama City, households’ exposure to mortgage debt accounted for around 96 percent of income in mid-2019 compared to 69.6 percent of income in 2012.
- Data limitations:
  - Formal price indices for nationwide residential and commercial real estate are not available.
  - Consumer and business sentiment indicators, volume of residential dwellings, and transactions by foreign buyers are unavailable.
  - Analysis uses Numbeo residential property price-to-income ratio for Panama City as proxy for property prices and Google Trends internet search activity as proxy for foreigners’ interest.

### Conclusions: Key recommendations (excerpt)
- Strengthen financial stability oversight:
  - Inform risk monitoring by a larger number of indicators, including results of stress tests.
  - Enhance stress-testing by considering more severe shocks, including prolonged recovery, cross-border, and financial group failures; implement the ICAAP to complement top-down stress tests.
- Align regulations more closely with the Basel III package:
  - Adopt and gradually phase in CCoB (2.5 percent of RWA for common tier 1 equity) for all banks.
  - Formalize regulation for the D-SIBs, including publication of the methodology to identify D-SIBs, and introduce the HLA capital surcharge for the D-SIBs.
  - Consider introduction of the CCyB for all banks and implementation of the NFSR after careful analysis.
- Use macroprudential policy more actively:
  - More flexible use of parameters in existing tools (leverage ratio, dynamic provisioning requirement, or risk weights).
  - Adoption of additional measures, e.g., direct limits on the LTV, DTI and DSTI ratios.
- Develop a tighter financial safety net:
  - Establish emergency liquidity assistance and the deposit insurance scheme and improve the bank resolution framework.
- Enhance regulatory framework and coordination:
  - Extend mandate of the FCC and strengthen its structure by expanding its membership.
  - Enhance role of MEF in the current coordination, crisis management and resolution framework.
  - Adopt the regulatory sandbox for fintech.

### Annex: Recent developments and banking center statistics (selected figures)
- Onshore/offshore bank counts and balance-sheet aggregates (Table A1.2 snapshots):
  - 2015 total number of banks: 93 (Onshore 48, Offshore 45).
  - 2017 total number of banks: 87 (Onshore 49, Offshore 38).
  - 2019 total number of banks: 78 (Onshore 45, Offshore 33).
  - Total assets (2015): 118.5; (2017): 119.7; (2019): 125.0.
  - Deposits total (2015): 83.8; (2017): 84.3; (2019): 88.1.
  - Internal deposits (2019): 55.8.
  - External deposits (2019): 32.2.
  - Credit portfolio net of (Total) (2019): 76.1; Internal (2019): 54.0; External (2019): 22.1.
  - Equity capital (2019): 15.9.
- Annex Table A1.1: Selected entries and exits in Panama International Banking Center (2014–2019) — examples include:
  - 2014 Exit: Bank Leumi Le-Israel, B.M (GL) Oct. 1982 - Aug. 2014 VL.
  - 2014 Entry: Canal Bank S.A. (BMF) GL Since Oct. 2014 New license.
  - 2018 Exit: BSI Bank (Panamá), S.A. IL Feb. 2014 - Mar. 2018 VL, res. 122-2017.
  - 2019 Exit: Banco Santander (Panamá), S.A. IL Aug. 1973-Dec. 2018 VL, res. 240-2017.
- SBP Financial Stability Map methodology (Text Box A1.4) lists dimensions and indicators used and additional indicators for consideration across Macro-economic risks, External risks, Credit risks, Solvency and profitability risks, and Liquidity risks.

*International Monetary Fund — Panama: Selected chapters and annexes (excerpts).*

### 4. Residential property prices in Panama City have been rising, precipitated by strong

### 4. Residential property prices in Panama City have been rising, precipitated by strong

### Residential price dynamics and foreign demand
- Ratios of residential real estate price-to-income and price-to-rent had risen by 52 percent and 34 percent, respectively, from 2012 to 2019 (Numbeo).
- Average dwelling sales price surged by 21 percent from 2015 to 2017 in Panama’s metropolitan area (Global Property Guide).
- Major foreign buyers originated from the United States, Europe, Canada, and Latin America.
- Panama’s economy grew at an average annual rate of 5 percent over the last five years, compared with an average annual growth rate of Latin American countries at 0.6 percent.

### Mortgage lending and household debt
- Commercial banks’ residential mortgage loans grew at an average annual rate of 11.7 percent, from 2012 to 2019.
- The share of residential mortgage loans to total loans increased from 28 percent to 34.5 percent over the same period.
- Household exposure to mortgage debt rose to 96 percent of income in 2019 (Numbeo), “close to the full amount of disposable income.”

### Assessment of possible “overheating” — model and out-of-sample results
- Baseline predictor for the residential property price-to-income ratio constructed using quarterly data Q4-2013 to Q4-2018 and used to predict Q1-2019 to Q2-2019.
- Results: a significant deviation in the out-of-sample period — the average difference between actual and predicted ratios in Q1-2019 to Q2-2019 is around 1.5 percentage points, or 2.4 standard deviations.
- Hypothesis tests based on t-distribution indicate the deviations are statistically significant in Q1-2019 and Q2-2019 at the 5 percent level.
- Three possible interpretations of the statistically significant divergence:
  - (i) Positive expectations of a future rebound in economic growth and lower mortgage rates underpinning resilience.
  - (ii) Disequilibrium between current property prices and fundamentals that could lead to a future correction.
  - (iii) “Missing variables” in the model.

### Drivers identified and model decomposition
- The predictor’s decline in the out-of-sample period is attributable to moderating economic growth and rising financing costs:
  - Real GDP growth moderated by 1.1 percentage points from Q1-2018 to Q1-2019.
  - Banks’ weighted average lending rate rose 51 basis points over the same period.
  - The predictor fell by 2 points from Q4-2018 to Q1-2019, while the observed price-to-income ratio rose by 0.2 points.
- Decomposition: real GDP growth and interest rate jointly explained 56 percent of the variations in the property price-to-income ratio.

### Data limitations and “missing variables”
- Key caveats:
  - Absence of a publicly available nationwide real estate price index; Numbeo’s residential price-to-income ratio (annual series from 2011, semi-annual from 2014) used as proxy.
  - Unavailability of statistics on volume of houses and dwellings, detailed volume of real estate loans, real estate purchases by foreigners (volume and value), and consumer and business sentiment indices.
- Suggested additional explanatory variables for extended econometric analysis:
  - Variations in property taxes.
  - Changes in the supply of houses (construction and residential permits).
  - Distribution of income and household debt across different population groups.
  - Business and household sentiment.
  - Real estate purchases by foreigners (volume and value).

### Changes in bank mortgage lending policies and growth in 2019
- A predictor for mortgage growth (Q4-2008 to Q4-2018) contrasted with actual Q1-2019 to Q2-2019.
- Findings:
  - Residential mortgage loans grew 5.3 percent (Y/Y) in Q2-2019, compared to the predictor at 3.4 percent (Y/Y).
  - The average divergence in the first half of 2019 is 1.8 percentage points, about 0.9 standard deviations above the mean.
  - Hypothesis tests suggest these deviations in Q1-2019 and Q2-2019 are not statistically significant at the 5 percent level — too early to conclude a structural change in banks’ lending practices.
- Decomposition for mortgage growth:
  - Nominal GDP growth and mortgage rates jointly explain 55 percent of the variations in residential mortgage loan growth.
  - Nominal GDP grew by an average 2.8 percent (Y/Y) in the first half of 2019, compared to 4.6 percent (Y/Y) during the same period in 2018.
  - Banks’ mortgage rate increased to 5.81 percent in 2019, from 5.56 percent in 2018.

### Existing macroprudential framework and suggested tools
- Current measures:
  - Superintendency of Banks (SBP) implemented a dynamic provisions rule (DPR) since June 30, 2014 as part of general rule for provisioning and credit risk management; DPR is part of regulatory capital but cannot be included in the calculation of capital to meet the regulatory minimum (banks must maintain DPR in addition to regulatory minimum of 8 percent).
  - Capital requirements are imposed on lending to household and corporate sectors.
- Sectoral capital requirements (effective July 1, 2016) for household sector:
  - 35 percent for main home if the loan-to-value (LTV) ratio is less than 80 percent with the appraisal completed in the last 3 years.
  - 50 percent for main home if the LTV ratio is between 80 and 100 percent, and appraisal conducted within 10 years.
  - 50 percent for main home if the LTV ratio is less than 80 percent, and appraisal was conducted more than 3 years ago.
  - 50 percent for mortgages on second homes, provided the LTV ratio is not greater than 80 percent, and the appraisal was conducted within the last 5 years.
  - 100 percent for all other mortgages.
  - Corporate sector example: 50 percent if pledged by commercial real estate used as collateral with an LTV ratio less than 60 percent and an appraisal conducted within the last 3 years; or if pledged by residential properties used as collateral with an LTV ratio less than 70 percent and an appraisal conducted within the last 3 years.
- Recommended additions to the macroprudential toolkit:
  - Limits on loan-to-value (LTV) ratios.
  - Caps on debt-service-to-income (DSTI) or loan-to-income (LTI) ratios.
  - These would complement the existing sectoral capital requirements.
- Indicators to monitor and trigger tightening (core and additional):
  - Core indicators: Credit/GDP gap; Growth in credit/GDP; Credit growth; Asset price deviations from long-term trends; House price-to-rent and house price-to-disposable income ratio; Household loan growth; Increasing share of household loans to total credit.
  - Additional indicators: DSTI ratios; Leverage on individual loans or at the asset level; Increasing wholesale funding ratio (noncore funding); Weakening exports and resulting current account deficits; Increasing share of FX loans and interest-only loans; Deteriorating lending standards; Housing price growth by region and property type; Distribution and averages of LTV, DSTI, and LTI ratios across new and outstanding loans.

*Source: IMF staff analysis (content unit: 1panea2020002).*

### 19. Sectoral tools should be activated or tightened when multiple indicators point to

### 19. Sectoral tools should be activated or tightened when multiple indicators point to

### Activation triggers and assessment of indicators
- Action should be taken when multiple indicators point to rising systemic risk; a single signal, or mixed signals, may not be sufficient for action.
- Examples illustrating ambiguous signals:
  - Strong growth in mortgage loans without house price growth may indicate improving housing penetration rather than increased risk.
  - Sharp increase in house prices without strong mortgage loan growth may reflect a shortage of house supply requiring structural policies rather than a macroprudential response.
- DSTI caps act as an automatic stabilizer—becoming more binding when house prices grow faster than disposable income, thereby helping to smooth credit booms.

### Gradual approach to tightening sectoral tools (policy sequencing)
- Recommended sequential policy response when several indicators show a gradual build-up of housing-sector risk:
  - First: intensify supervisory scrutiny and step up communication.
  - Next: tighten less distortionary sectoral capital requirements to build additional buffers.
  - Subsequently: introduce tighter limits on LTV and/or DSTI ratios if prior measures are not expected to meet policy objectives.
- Operational detail:
  - LTV and DSTI caps should always be imposed on the flow of new household loans to avoid forcing existing high LTV or DSTI borrowers to provide more collateral or repay part of loans, which could cause distress.

### Combining sectoral tools and transmission channels
- Combining tools can reinforce effectiveness and mitigate shortcomings of any single tool:
  - Higher risk weights → lenders hold extra capital, restraining credit growth via higher lending rates.
  - Limits on LTV ratios → cap loan size relative to appraised value.
  - Caps on DSTI and LTI ratios → restrict debt service payments to a fixed share of household incomes.
- Complementarity examples:
  - When house prices increase, LTV limits may become less effective but DSTI or LTI caps can continue to restrict credit relative to income.
  - DSTI caps enhance LTV limits by containing use of unsecured loans to meet minimum down payments.
  - In a low interest rate environment, DSTI caps complement LTV limits in containing increases in household leverage and help mitigate defaults when interest rates rise.
- Intended outcomes from tightening (Figure 6 transmission mechanism):
  - Actions: tighten sectoral capital requirements (sectoral risk weights ↑, LGD floors ↑, capital buffers ↑); tighten limits on DSTI ratios (Maximum DSTI ratios ↓); tighten limits on LTV ratios (Maximum LTV ratios ↓).
  - Transmission channels: credit supply channel (banks raise more capital → funding/lending rate ↑), credit demand channel (borrowing constraints bind → loan availability ↓), expectation channel (anticipating lower capital gains/profits → lenders’ deleveraging, borrowers’ speculative incentives ↓), resilience channel (capital against unexpected losses ↑ → probability of default ↓, loss given default ↓), anti-default channel (minimum down payment ↑ → default incentives ↓).
  - Outcomes: Household loan growth ↓; share of systemically risky loans ↓; House prices ↓; Price-to-Rent and Price-to-Income ratios revert toward trend.

### Expanding the regulatory perimeter
- Sectoral tools applied only to banks may be ineffective if credit expands via domestic nonbank financial institutions (e.g., credit cooperatives).
- Policymakers need to expand the regulatory perimeter to nonbank financial institutions through inter-agency cooperation.
- Country institutional example (Panama): commercial banks — Superintendency of Banks; insurance companies — Superintendence of Insurance and Reinsurance; cooperatives — Panamanian Autonomous Institute for Cooperatives.

### When to loosen macroprudential policies
- Loosening can contain feedback loops between falls in credit and house prices during housing busts (credit crunch → further house price declines; strategic default, fire sales, contraction in credit supply create negative externalities).
- Indicators to guide loosening:
  - Use the same indicators informing tightening when they turn in the opposite direction.
  - Fast-moving indicators: house transaction volumes and spreads on household loans.
- Preconditions for loosening:
  - A softening housing market alone is not sufficient; evidence of systemic stress is vital, such as simultaneous decline in prices and credit and an increase in non-performing loans or defaults.
  - If large additional buffers were built during tightening, they can be released to avoid a credit crunch without jeopardizing banks, but relaxation should not go beyond a “permanent floor” considered safe in downturns.
  - Clear communication that tightening can be followed by relaxation is important to avoid market misinterpretation (BIS, 2012).
- Limitations:
  - Loosening may be subject to “pushing on a string”: banks may remain reluctant to lend due to risk aversion or capital constraints; borrowers may avoid entering markets while prices fall. Nonetheless, relaxation can help contain spillback effects.
  - Housing demand and house price growth financed directly by foreigners may undermine macroprudential effectiveness; in such cases, higher stamp duty or capital gains tax may be useful (examples cited: Hong Kong SAR and Singapore).

### Findings, surveillance gaps, and policy implications for Panama
- Empirical findings (first half of 2019):
  - Residential real estate prices in Panama City and commercial banks’ mortgage lending appear to be growing faster than suggested by the econometric models during the first half of 2019.
  - Divergences could reflect improved liquidity of the housing market or heightened moral hazard in lending practices; further investigation is needed.
  - It is too early to conclude that banks’ lending practices have changed although some signs of departure between mortgage loan growth and the model appeared in Q2 2019.
- Policy recommendations:
  - Treat findings as early signals of possible risks and guide further data collection and analysis.
  - Strengthen monitoring of the housing market, household debt, and bank lending practices.
  - Fortify the macroprudential framework and expand toolkits available to the SBP for early intervention.
  - If lax underwriting standards are detected, undertake intrusive and tighter prudential supervision and appropriate enforcement actions.
  - Authorities should establish new data, including formal real property price indices (residential and commercial) and real estate transactions by foreigners (value and volume), to enhance surveillance and forecast accuracy.
- Suggested extension:
  - Extend analysis to commercial real estate prices given Panama’s optimistic economic growth and foreigners’ interest in the property sector; this requires new data including a commercial property price index.

### Annex I — Conceptual caveats on “fundamentals” and “predictors”
- “Fundamental” price definitions are model-specific; examples of determinants of fundamentals include:
  - Present discounted value of future rents.
  - Liquidity of the housing market (e.g., in migration scenarios).
  - Presence and extent of credit constraints.
  - Moral hazard from implicit or explicit government guarantees to the banking sector.
- Paper uses the term “predictor” to reflect econometric model dependence and to avoid confusion with model-dependent definitions of “fundamentals”.

### Annex II — Model: Residential real estate price-to-income
- Two model specifications:
  - Model 1(a): Yi = αi + β1 X1,i + β2 X2,i + β3 X3,i + εi
  - Model 1(b): Yi = αi + β1 X1,i + β2 X2,i + β3 X3,i + β4 X4,i + εi
- Variables:
  - Yi = Residential property price-to-income ratio
  - X1,i = Real GDP Growth (in percent, Y/Y)
  - X2,i = Population (in thousands)
  - X3,i = Interest rate, based on commercial banks’ weighted average lending rate (in percent per annum)
  - X4,i = Foreigners’ interest, based on internet searches using keywords "Panama City apartments" and "Panama City houses" from Google Trends (in percent change, Y/Y)
- Data sources:
  - Residential Property Price-to-Income Ratio: Numbeo
  - Real GDP Growth: IMF World Economic Outlook
  - Population: United Nations (World Population Prospects 2019)
  - Interest Rate: Superintendency of Banks
  - Foreigners’ Interest: Google Trends
- Modelling notes:
  - Model 1(a) is based on fundamentals: real GDP growth, population, weighted average lending rate.
  - Model 1(b) augments model 1(a) with Google Trends quarterly (Y/Y) change as proxy for foreigners’ interest; quarterly Y/Y change is computed to remove seasonal effects.
  - Quarterly data for price-to-income ratio and population are derived using spline interpolation.
- Regression results (Period Q4,2013-Q4,2018):
  - Coefficients (standard errors in brackets):
    - Interest rate: Model 1(a) = -3.0601 (0.69539); Model 1(b) = -3.3704 (0.64557)
    - Real GDP Growth: Model 1(a) = 0.9251 (0.14211); Model 1(b) = 0.9638 (0.12989)
    - Population: Model 1(a) = 0.0133 (0.00137); Model 1(b) = 0.0133 (0.00124)
    - Foreigners' Interest: Model 1(b) = 0.0257 (0.0118)
    - Constant: Model 1(a) = -27.8815 (5.06804); Model 1(b) = -26.0511 (4.66517)
  - Goodness of fit:
    - R-squared: Model 1(a) = 0.85507; Model 1(b) = 0.8882
    - Adjusted R-squared: Model 1(a) = 0.82949; Model 1(b) = 0.8602
    - Durbin-Watson statistics: Model 1(a) = 1.7190; Model 1(b) = 1.8111
  - Significance:
    - All coefficients significant at 1%, except "Foreigners' Interest" significant at 5%.
  - Augmenting with Google Trends increases adjusted R-squared from 83 percent to 86 percent and improves in-sample fit; actual price-to-income ratio and predictor are cointegrated and no significant autocorrelation is detected (Engel-Granger test for cointegration; Breusch-Godfrey serial correlation LM).
- Hypothesis tests for Q1 2019 and Q2 2019 differences between actual and predictor:
  - Sample mean = 0.1278; Standard deviation = 0.5659; N = 23
  - Q1 2019:
    - Test statistic, Zi = 2.32071
    - Critical value, tcrit,i = 1.717 (t-distribution, 5 percent significance, n = 23)
    - Result: Reject Ho since Zi > tcrit,i. Observed price-to-income ratio significantly different from predictor in Q1 2019.
  - Q2 2019:
    - Test statistic, Zj = 2.4745
    - Critical value, tcrit,j = 1.717 (t-distribution, 5 percent significance, n = 23)
    - Result: Reject Ho since Zj > tcrit,j. Observed price-to-income ratio significantly different from predictor in Q2 2019.
- Time-series differences (Selected final observations):
  - 03/31/19: Actual (A) = 11.93; Predictor (B) = 10.49; Difference (A)-(B) = 1.44
  - 06/30/19: Actual (A) = 12.02; Predictor (B) = 10.49; Difference (A)-(B) = 1.53

*Source: IMF staff analysis as presented in the chapter.*

### Annex III. Model: Growth in Residential Mortgage Lending

### Annex III. Model: Growth in Residential Mortgage Lending

### A. Model
- Model equation:
  Zj = αj + γ1 V1,j + γ2 V2,j + γ3 V3,j + γ4 V4,j + εj

- Definitions:
  - Zj = Growth in commercial banks' residential mortgage loans (in percent, Y/Y)
  - V1,j = Mortgage rate (in percent)
  - V2,j = Growth in construction loans (in percent, Y/Y)
  - V3,j = Population growth (in percent, Y/Y)
  - V4,j = Nominal GDP growth (in percent, Y/Y)
  - αj = Constant
  - εj = Residuals

- Variables — Data Sources:
  - Commercial Banks' Residential Mortgage Loans: Superintendency of Banks
  - Mortgage Rate: Superintendency of Banks
  - Construction Loan: Superintendency of Banks
  - Population: United Nations
  - Nominal GDP: IMF

### A. Results (Regression)
- Interpretation from text:
  - Model uses four explanatory variables: mortgage rate, growth in commercial banks’ lending to the construction sector, population growth, and nominal GDP growth.
  - Estimated coefficients are all in the expected signs and are statistically significant.
  - Positive growths in lending to the construction sector, population, and nominal GDP lead to an increase in residential mortgage loan growth.
  - Higher mortgage rates reduce demand for mortgage loans.
  - Observed residential mortgage loan growth and the predictor are cointegrated (Engel-Granger test).
  - No significant autocorrelation detected.

- Estimated coefficients (standard errors in brackets):
  - Mortgage rate: -2.1697 (-1.1721)
  - Nominal GDP Growth(-3): 0.4161 (-0.0787)
  - Construction Loan Growth: 0.1664 (-0.05)
  - Population Growth: 58.1337 (-20.0855)
  - Constant: -81.9907 (-30.0053)

- Goodness-of-fit and diagnostics:
  - R-squared: 0.8267
  - Adjusted R-squared: 0.8075
  - Durbin-Watson statistics: 1.7
  - Period: Q4,2008-Q4,2018

- Note:
  - Standard errors are in brackets.
  - All coefficients are significant at 1%, except for mortgage rate which is significant at 10%.

### B. Hypothesis Test: Are the Observed Growths in Banks’ Mortgage Loans Significantly Different from the Predictor in Q1 2019 and Q2 2019?
- Hypotheses:
  - Ho: (A)-(B) = 0
  - H1: (A)-(B) ≠ 0

- Sampling statistics:
  - Mean = 0.0818
  - Standard deviation = 1.7762
  - N = 43

- Q1 2019:
  - Test statistic, Zi = 0.8593
  - Critical value, tcrit,i = 1.681 (t-distribution, 5 percent significance level, n=43)
  - Result: Accept Ho since Zi < tcrit,i. Therefore, the observed growth in banks’ mortgage loans is not significantly different from the predictor in Q1-2019.

- Q2 2019:
  - Test statistic, Zj = 1.0292
  - Critical value, tcrit,j = 1.681 (t-distribution, 5 percent significance level, n=43)
  - Result: Accept Ho since Zj < tcrit,j. Therefore, the observed growth in banks’ mortgage loans is not significantly different from the predictor in Q2-2019.

- Selected quarterly Actual (A), Predictor (B), Difference (A)-(B) entries (from the series):
  - 03/31/19: Actual = 5.3996; Predictor = 3.7915; Difference (A)-(B) = 1.6082
  - 06/30/19: Actual = 5.3107; Predictor = 3.4010; Difference (A)-(B) = 1.9098

*Source: IMF staff calculations.*

### 12. The institutional framework needs to

### 12. The institutional framework needs to be strengthened to avoid the middle-income trap

### Institutional governance and trust
- Panama has moved into a higher income category, but the governance framework requires reform to enable sustained growth.
- The UNDP report on Human Development in Panama (2019) emphasizes institutional reform to address low levels of trust in institutions and weaknesses such as the judicial system and corruption identified by international investors.
- Panama ranks 110th in “Institutional checks and balances” of the GCI.
- Corruption Perception Index (CPI) data referenced (2018) and an IMF staff calculation include a 90 percent confidence interval for Panama.

### Public administration: capacity and professionalization
- Finding: Public administration needs to build capacity to become more efficient and meet standards appropriate for a high-income economy.
- UNDP recommends a shift to a results-based institutional culture and limiting the strong association between state operations and the current government that leads to high rotation of government officials and lack of professionalization of the civil service.
- Policy Options:
  - Professionalization of public administration, including a shift towards results-based objectives.
  - Increase transparency and efficiency of public spending: phase out turnkey projects, strengthen accountability of public officials, and improve communication (website, data provision to the public, press releases).

### Judicial system: deficiencies and costs
- Findings:
  - Judicial independence is ranked very low: 129 out of 141 countries, and is deteriorating.
  - Perceptions: system is slow, lacks accessibility and transparency; many unaddressed cases; lack of convictions on corruption.
  - GCI rank on settling disputes: 110 out of 141 countries.
- Constitutional reform process: new administration started it, but no social consensus on content; reform package withdrawn from the National Assembly at the end of 2019; UNDP will coordinate dialogue with civil society to draft the reform.
- Policy Options:
  - Increase the budget of the justice administration (currently 1.3 percent of the general budget; UNDP international recommendation: 2 percent - 6 percent).
  - Address shortcomings of the judicial system.
  - Facilitate access to legal assistance for many Panamanians that cannot afford its cost.

### Labor market and human capital
- Finding: Inflexible wage setting and strong restrictions on hiring and firing practices stifle competition and lead to inefficient allocation.
  - Panama ranks among the lowest 30 countries worldwide in the link between pay and productivity and hiring and firing practices (Global Competitiveness Index).
- Shortage of skilled labor:
  - Expansion in skill-intensive industries (logistics and other tradable services) faces shortages of skilled employees.
  - Deficiencies in the education system and restrictions on hiring foreign workers restrict expansion of high value-added industries.
- Policy Options:
  - Educational reform to tackle low quality of education (teacher training, curriculum) and low secondary enrollment.
  - Strengthen higher education and research institutes (better funding and more research positions).
  - Short-term: ease restrictions on foreign workers, especially in sectors with high skilled shortages (maybe also qualified teachers).

### Innovation and R&D to boost productivity
- Finding: Future high growth depends on innovative capacity: continued attractiveness to FDI, expansion into high value-added sectors, and a skilled workforce to absorb knowledge spillovers.
  - Promising indicators: number of trademark applications and survey responses on buyer sophistication.
  - Weaknesses: Panama lags in quality of research institutions and R&D expenditure.
  - Past: special economic zones attracted foreign talent and knowledge-intensive industries, but spillovers to the local economy appear limited (also due to restrictions on mobility of foreign workers).
- Policy / initiative noted:
  - National strategy to raise investment in science, research and development to 1 percent of GDP by investing US$ 4.3 billion until 2024.

### Infrastructure: overview
- Finding: Existing infrastructure is strong compared to regional peers, but further upgrades are needed to reach high-income living standards and sustain productive capacity.

### Water supply and management
- Findings:
  - Panama ranks 90 out of 140 countries on reliability of water supply in the GCI (score declining since previous review).
  - Exposure to unsafe drinking water: 66/140, 10.2 percent of the population.
  - Water access higher in urban than rural areas; large share in underdeveloped indigenous territories lacks piped water.
  - IDAAN has not raised tariffs since 1982; collection rates are low; runs a sizeable operational deficit which increased US$ 80.5 million (0.1 percent of GDP) in 2018, forcing focus on emergencies and maintenance.
  - Currently, 55 percent of the population receives water from eight water treatment plants that draw from lakes Gatun and Alajuela.
  - ACP imposed cargo limitations in 2019 due to low water levels; lake capacity becoming insufficient to smooth precipitation fluctuations.
- Policy Options:
  - Amplify fresh-water reservoirs: ACP evaluating options including three options to construct a third water reservoir farther from the canal; other possibilities include desalination or increasing existing reservoir capacity.
  - Improve efficiency of water system: Panama loses an estimated 40 to 48 percent of fresh water in distribution due to leakages and lack of investment; fresh water is basically free creating weak incentives to avoid waste; reform water pricing and invest in water management infrastructure to reduce leakages.
    - Larsen (2019) estimate referenced: reducing leakages to under 1 percent would be equivalent to constructing a new reservoir of the size of Alajuela.

### Electricity sector
- Findings:
  - Electricity generation increased on average 7 percent per year over the last five years.
  - Around 60 percent of electricity is hydroelectric (12.4 percent growth rate); the rest mostly from fuel-oil, non-renewable sources.
  - Panama aims for 70 percent of the national energy mix from renewables by 2050 (National Energy Plan 2015-50).
  - Access to electricity (2017): 91.2 percent nationwide; 98.5 percent in Panama City; 77.1 percent in the province Darien.
    - In comarcas Ngäbe Buglé and Guna Yala only 7.5 percent and 3.6 percent respectively received electricity from distribution companies (comarcas have other sources such as solar panels and kerosene).
  - Sector vulnerability: dry seasons and El Niño increase marginal cost of electricity as hydroelectric generation falls and thermoelectric plants are required; transmission line upgrades lag generation investment.
  - Electricity pricing and subsidies:
    - Basic consumption of less than 100 kWh is cross-subsidized by consumption exceeding 500 kWh.
    - Special tariffs exist for pensioners, disabled persons, farmers, political parties.
    - Government uses general subsidies benefiting over 90 percent of consumers, households and businesses alike.
    - In 2019, government spent US$ 193 million (0.3 percent of GDP) on electricity subsidies; policy expected to continue in 2020.
- Policy Options:
  - Phase-out general electricity subsidy and improve targeting (e.g., social transfers or continued subsidies only for low-income consumers/small businesses).
  - Continue investment in transmission lines (e.g., 4th transmission line).
  - Tackle climate-change challenges: diversify renewable energy matrix and improve water management.
  - Reduce dependence on generators to mitigate high oil price exposure and phase out non-renewable energy sources.

### Transportation
- Findings:
  - Ports and Tocumen airport are among the most competitive in the world, supporting logistics sector growth and attracting FDI.
  - Advances concentrated in Panama City and Colon; rest of country needs better road access, particularly “last mile” and secondary roads.
  - Investment in regional transportation would support tourism growth and address rural poverty.
- Ongoing projects: several large transportation infrastructure projects are in place.

### Information and Communication Technology (ICT) and financial inclusion
- Findings:
  - Only 46 percent of the population had a bank account in 2017, below the Latin America and Caribbean average of 55 percent.
  - Only 69.1 percent of businesses used a current or savings account, compared to 92.9 percent in the region.
  - Reasons for not having accounts (Global Findex 2017): insufficient funds to open an account (36 percent), too expensive financial services (34 percent), distance to financial institution (18 percent).
  - Panama is close to a digital interconnection of submarine cables and has access to higher bandwidth than most OECD countries, offering potential to attract IT companies if skilled workforce investment occurs.
- Policy implication: Fintech can improve financial inclusion and reach rural and indigenous populations at lower infrastructure cost.

### Concluding remarks
- An ambitious structural reform agenda is needed to ensure sustainable, inclusive growth and prevent the “middle-income trap.”
- Key priorities: continuously improve the business environment, advance quality of education, mitigate institutional vulnerabilities, foster innovation, invest in infrastructure and climate change preparedness.
- Panama’s foundation as a logistics and transportation hub can support transformation into a technology-intensive, innovative economy with sustained growth if the right economic conditions are created.

*International Monetary Fund — Chapter: "12. The institutional framework needs to be strengthened to avoid the middle-income trap."*

### 2.      Progress on poverty

### 2.      Progress on poverty

### Key findings on poverty reduction
- Extreme poverty rate (World Bank definition) dropped from 12.4 percent in 2000 to 2.5 percent in 2017.
- General poverty rate fell from 35.5 percent in 2000 to 14.1 percent in 2017.
- Average income growth of the bottom 40 percent of earners has been faster than that of an average citizen.
- Rural poverty remains high and is particularly elevated and persistent in the comarcas (territories inhabited by indigenous peoples).
- National poverty rate in Panama was 20.7 percent in 2017, while poverty rate in the comarcas was 79.6 percent in 2017 (note: these estimates differ methodologically from World Bank headcount ratios mentioned above).
- Panamanian indigenous population has the lowest electricity coverage in Latin America and the largest gap in access to clean water and sanitation between indigenous and non-indigenous residents.

### Box 1 — President Cortizo’s Commitments to Advance Social Policies
- Poverty and inequality (El Plan Colmena “Panama libre de pobreza y desigualdad, la Sexta Frontera”):
  - Aims to improve lives of more than 777,000 Panamanians living in multidimensional poverty in 300 corregimientos of 63 districts.
  - Focus areas: (i) improving public services (healthcare, potable water, sanitation, rural electrification, road infrastructure, education, housing); (ii) providing employment to lift people out of poverty.
  - Pilot program launched in 6 corregimientos in the Capira district with technical support from UNDP and FAO.
- Education and nutrition (Estudiar sin Hambre):
  - Objective: provide balanced and nourishing meals to students in primary and secondary schools of the 300 poorest corregimientos; support local farmers by purchasing their products.
  - Approved end-2019; expected pilot in 2 schools in the Ngäbe Buglé region and one in San Miguelito.
  - Executed by the Ministry of Education in coordination with the National Secretariat for the Food and Nutritional Security Plan.
- Climate:
  - Priorities include mobilizing state and private resources for “climate-friendly” investment, promoting energy-generation innovation, protecting vulnerable communities, promoting access to information and empowering civil society, and facilitating climate action among young people through projects such as the National Climate Transparency Framework and the Youth Academy on Climate Change.

### Education: outcomes, spending, and priorities
- Total social spending decreased from 10 percent of GDP in 2000 to 9 percent of GDP in 2018; budget allocations to education remain some of the lowest in the region.
- Enrollment rates (mainly in secondary education) and expected years of schooling in Panama lag the poorest countries in the Americas (Nicaragua and Haiti).
- Panamanian students underperformed in international education tests, scoring on average only 32 percent above minimal attainment.
- In the 2018 PISA, Panama ranked 71 out of 77 countries, with little change since 2009.
- Firms identified poorly educated local workers as the third most important obstacle to doing business (World Bank Enterprise Survey).
- Recent initiatives:
  - Academia Panamá para el Futuro launched November 2019; 2020 cohort limited to 90 students.
- Recommended strategy elements:
  - Better align academic curricula with private-sector needs.
  - Expand training, monitoring and evaluation programs for teachers.
  - Offer culturally appropriate education opportunities to indigenous communities.
  - Expand targeted support programs for poor students (e.g., Beca Universal).

### Poverty in the comarcas (indigenous territories)
- Indigenous groups represent 14 percent of Panama’s population.
- Poverty and lack of social services highest among indigenous groups; extreme disparities persist.
- Policy recommendations for comarcas:
  - Better provision of basic infrastructure and public services.
  - Delivery of culturally appropriate economic opportunities (jobs) developed in close cooperation with tribal leaders and service providers.
  - Higher degree of inclusion of the indigenous population in national decision-making processes.
  - Implement the Comprehensive Development Plan for Indigenous Peoples in Panama (consensual vision from 12 indigenous congresses).
  - Conduct continuous evaluation of the effectiveness and quality of education, social assistance and health programs in the comarcas.

### Social support programs: coverage and gaps
- Key programs:
  - Red de Oportunidades (conditional cash transfer, introduced 2006 for families in extreme poverty).
  - 120 a los 65 (originally 100 a los 70) in operation since 2009; provides US$120 per month to individuals over 65 years who do not receive contributory pensions.
  - Beca Universal (2010) cash transfer to children for school achievements.
  - Angel Guardian (2012) social assistance to people with severe disabilities in poverty or vulnerable conditions.
- While these programs contributed to improved social outcomes, gaps remain in coverage, targeting mechanisms and cross-program coordination.
- World Bank and development partners are working with MIDES on updating conditional cash transfer programs, including full recertification of beneficiaries to improve targeting and enhance coverage.

### Gender equality: status and reforms needed
- Panama ranked 108 out of 160 countries in gender equality in 2017; scored worse than regional and high-income peers.
- Areas of concern: relatively high labor force participation gap, very high adolescent birth rates, elevated maternal mortality rates compared to peers, and political underrepresentation.
- Educational outcomes for girls exceed those of boys in attendance and test scores but do not translate into higher wages or better access to financial products.
- Institutional responses:
  - Gender Parity Initiative (GPI) created July 2018; National Council for Gender Parity launched July–October 2018.
  - GPI plan: 12 measures and 59 actions (promote job opportunities for vulnerable women, implement equal opportunity measures within companies).
- Legal constraints (Women, Business and the Law 2020 Index):
  - Panama scored 79.4 on the Index.
  - Specific shortfalls: pension and pay dimensions scored 50 out of 100.
  - Entrepreneurship score of 75 indicates women face greater regulatory constraints starting and running businesses (including access to financing).
- Suggested legal reforms:
  - Introduce and enforce equal-pay legislation.
  - Equalize mandatory retirement age (currently women retire at 57 years and men at 62 years).
  - Establish pension credits for periods of childcare.
  - Prohibit gender-based discrimination in access to financial services.

### Climate change: risks and policy directions
- Climate change affects agriculture, tourism, energy and transport, with direct impacts on populations lacking adaptation resources; initial inequality causes disadvantaged groups to suffer disproportionately from climate impacts.
- Vulnerable populations include indigenous communities on island clusters and shorelines (e.g., Guna people in Guna Yala), and residents of Panama City and Colón metropolitan areas.
- Adaptation policies:
  - Authorities have developed numerous policies and initiatives in collaboration with international agencies.
  - Government actions include creation of a Joint Task Force, a Regional Satellite Visualization and Monitoring System, National Water Security Plan 2015-50, vulnerable community reallocation programs, and plans for agricultural sector resilience.
  - Many initiatives remain at feasibility or planning stages; long-term fiscal implications and financing sources not fully identified.
- Mitigation policies:
  - Despite low per-capita and aggregate greenhouse gas contributions, Panama committed to meeting growing electricity demand with mostly renewable energy, leveraging hydroelectric resources.
  - Commitments include: promote technologies for energy efficiency and storage; sustainably manage forest resources through reforestation and agroforestry; protect water resources.
- Water management:
  - Fresh water is becoming increasingly scarce due to rising demand, volatile rainfall, sizable technical losses and lack of storage.
  - An estimated one-half of drinking water is currently lost before reaching the consumer.
  - Combined annual cost of extreme weather events estimated to range between US$ 125 and 150 million (0.36% to 0.42% of GDP), according to the Strategic Government Plan “Panama 2030”.
  - Urgent upgrades of water infrastructure and prudent resource management are crucial to secure water supply.

*International Monetary Fund — Chapter 2: Progress on poverty (excerpts).*

### 13.      The timing for reform is opportune. The incoming administration should capitalize on

### 13.      The timing for reform is opportune. The incoming administration should capitalize on

### Rationale for timely reform
- Panama has existing strengths to build on: a stable macroeconomic environment, strong growth, and relatively favorable demographics.
- Timely, targeted reforms are imperative to:
  - take full advantage of Panama’s existing economic potential; and
  - expand its potential output in the long-to-medium term by raising social capital and harnessing the full extent of its human resources.

### Priority domestic challenges to address
- Poor quality of public education.
- High poverty rates among remote and indigenous populations.
- Inequality of opportunity for disadvantaged gender and ethnicity groups.
- The need for a wider and more robust social safety net.
- The adverse impact of climate change.

### Evidence and indicators included in the content unit
- Figure label: Freshwater Resources Per Capita (Cubic meters, 2017)
  - Country list shown: Peru; Chile; Colombia; Panama; Uruguay; Ecuador; Nicaragua; Costa Rica; Paraguay; Honduras; Argentina; Guatemala; Mexico; El Salvador; Dom. Rep.; Haiti
  - Unit label: Thousands
- Figure label: Panama's Potable Water Losses 1/ (Percent of production)
  - Time axis shown: 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

### Policy implications (derived from stated goals)
- Design reforms that leverage macroeconomic stability and demographic advantages to:
  - Improve public education quality to raise human capital.
  - Target poverty reduction programs to remote and indigenous populations.
  - Promote equality of opportunity across gender and ethnic groups.
  - Expand and strengthen the social safety net.
  - Implement climate adaptation and mitigation policies to reduce adverse impacts on vulnerable groups.

*https://www.imf.org/-/media/files/publications/cr/2020/english/1panea2020002.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1panea2020002.pdf_