## 1panea2020003

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---

### EXECUTIVE SUMMARY — Context
- Panama has been one of the most dynamic economies in Latin America over the last two decades, supported by an investment boom including the expansion of the Panama Canal.
- The strength of the economy is being tested by the outbreak of the COVID-19 global pandemic.
- The 2020 Article IV Consultation was concluded by the Executive Board on a lapse of time basis on March 24.
- Discussions for the mission took place via conference calls and videoconferences during March 27–April 7, 2020. The staff team comprised Alejandro Santos (head), Olga Bespalova, Julian Chow, and Marina Rousset (all WHD). Paola Aliperti and Madina Toshmuhamedova (WHD) assisted the team.
- Document dated April 8, 2020.

### Request for Fund support
- Authorities requested financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 376.8 million, equivalent to 100 percent of quota.
- The full amount will become available upon Board approval and will be used for budgetary support.
- Authorities stand ready to continue cooperating with the Fund in finding solutions to balance of payments and fiscal imbalances.

### Macroeconomic policies and immediate priorities
- Main short-run policy challenge: minimizing loss of human lives from COVID-19.
- Health sector actions:
  - Government declared a National Emergency.
  - Ministry of Public Health designed a plan including increasing testing and the number of hospital beds.
  - Ministry of Economy and Finance released US$50 million to buy health and hygiene supplies, advanced US$9 million to the Ministry of Health and US$1.3 million to other entities.
- Fiscal stance:
  - Change in fiscal stance with a more active use of macroprudential policies.
  - Lower tax collections and pressures on health services likely to generate a higher fiscal deficit, implying a temporary deviation from the fiscal rule.
  - National Assembly temporarily allowed the government to request a higher deficit than the Social and Fiscal Responsibility Law (SFRL) limits for 2020 amid a national emergency declaration; SFRL limits will become binding again starting in 2021.
- Financial sector measures:
  - Superintendency of Banks relaxing regulations on dynamic provisioning to improve liquidity.
  - At least 14 banks announced relief measures: grace periods of 3–4 months for loan payments, elimination of the minimum payment on credit cards, and reductions in interest rates.
  - Staff recommends enhanced liquidity monitoring (reporting deposit flows and expected outflows) and consideration of an emergency liquidity facility operated by the BNP, with access for any solvent bank using public debt instruments as collateral.
  - Temporary release of banks’ dynamic provisioning could inject some US$1.3 billion of additional liquidity (about 2 percent of GDP).

### Recent developments (pre-COVID and early 2020)
- Growth and activity:
  - Average annual growth of 6 percent over the last 25 years, but growth moderated to 3 percent in 2019.
  - Economic activity index for January 2020 was below 3 percent.
- Fiscal:
  - Fiscal deficit contained at about 3 percent of GDP in 2019 after revenue shortfalls and expenditure tightening; fiscal rule was modified in 2019.
- Financial system:
  - Banking system well capitalized, credit growth moderated sharply, NPLs remain low.
- External:
  - Current account deficit improved to 5.2 percent of GDP in 2019 (from 7.9 percent of GDP in 2018), driven by a surge in copper exports.

### Impact of COVID-19 — key staff estimates and projections
- Epidemiological and containment context (as of April 6):
  - Confirmed cases: 2,100
  - Fatalities: 55
- Economic projections (staff preliminary estimates):
  - Real GDP: projected to contract by 2 percent in 2020 (from 5 percent expected pre-shock).
  - Current account deficit: could widen to 6.8 percent of GDP in 2020 (from 5.2 percent of GDP in 2019).
  - Fiscal deficit: may increase to 6¼ percent of GDP in 2020 (from the target of 2¾ percent of GDP), surpassing SFRL limits.
- Staff quantified 2020 Pre-Post-COVID changes (percent or point differences):
  - GDP growth (%): Pre-COVID 5.0; Post-COVID -2.0; Change -7.0
  - Inflation (%): Pre-COVID 1.0; Post-COVID -1.0; Change -2.0
  - Fiscal deficit: Pre-COVID 2.8; Post-COVID 6.3; Change 3.5
  - Public debt (NFPS): Pre-COVID 43.1; Post-COVID 48.5; Change 5.4
  - Credit growth (%): Pre-COVID 5.6; Post-COVID 2.0; Change -3.6
- Balance of payments impact (2020, USD and percent of GDP):
  - Estimated BOP impact of the shock for 2020: US$3.7 billion (5.7 percent of GDP).
  - Drivers of BOP gap:
    - Foreign direct investment (FDI): deterioration US$2.3 billion.
    - Current account deterioration: US$0.8 billion.
    - Portfolio investment: US$0.7 billion.
- Detailed 2020 Pre-Post-COVID BOP line items (in billions of U.S. dollars, Pre-COVID; Post-COVID; Δ):
  - Current account: -3.6; -4.4; -0.8
  - Non-oil balance: -6.6; -6.1; 0.4
  - Oil balance: -2.8; -1.5; 1.3
  - Colon Free Zone: 2.0; 1.5; -0.5
  - Tourism: 3.4; 1.7; -1.7
  - Canal receipts: 3.3; 2.5; -0.7
  - Other current: -2.9; -2.5; 0.4
  - Foreign direct investment: 5.2; 2.9; -2.3
  - Portfolio Investment: 0.9; 0.2; -0.7
  - BOP Financing gap: ...; ...; -3.7
  - (In percent of GDP) ...; ...; -5.7
  - Potential financing: ...; ...; 3.7
  - IMF (RFI): ...; ...; 0.5
  - Other IFIs: ...; ...; 0.7
  - Savings Fund (FAP): ...; ...; 0.3
  - Unidentified support: ...; ...; 2.2
- Fiscal accounts 2020 Pre-Post-COVID (In percent of GDP, Pre-COVID; Post-COVID; Δ):
  - Current revenue: 18.4; 16.7; -1.7
  - Tax revenue: 8.8; 8.0; -0.8
  - Non-tax revenue: 3.8; 2.7; -1.0
  - Other: 5.9; 5.9; 0.1
  - Expenditure: 21.2; 22.9; 1.7
  - Current: 13.4; 16.2; 2.8
  - Interest: 2.0; 2.3; 0.2
  - Capital: 5.8; 4.5; -1.3
  - Overall balance: -2.7; -6.25; -3.5
  - Overall balance (In billions U.S. dollars): ...; ...; -2.1
  - Potential financing (In billions of U.S. dollars): ...; ...; 2.1
  - IMF (RFI): ...; ...; 0.5
  - Other IFIs: ...; ...; 0.7
  - Savings Fund (FAP): ...; ...; 0.3
  - Unidentified support: ...; ...; 0.5

### Policy measures taken by authorities
- Public health and social measures:
  - Enforcement of social distancing and “sanitary fence” checkpoints outside Panama City and Colon.
  - Increasing hospital beds and importing medicines and medical equipment with additional budgetary support.
  - Strengthening “Panama Solidario” to provide US$100 per month to poor families dependent on informal jobs.
  - Suspension of payments for public services for low-income residents for four months.
  - Expanded budget support to municipalities for local healthcare needs.
- Economic measures:
  - Extension of deadlines for tax payments and reallocation of spending to priority areas.
  - Authorities adjusted state-controlled fuel prices more frequently and plan to negotiate a 5 percent reduction of electricity distribution tariffs.
  - Approved purchases of emergency food supplies.
  - The Ministry of Economy and Finance advanced budgetary allocations to speed up COVID-19-related spending.
- Emergency fiscal package details (selected):
  - Creation of a "Panama Solidarity Plan" with an initial fund of US$428 million to support health care and social spending.
  - Superintendence of Banks authorized the release of US$1.3 billion in commercial banks’ dynamic provisioning.

### Financing strategy and multilateral engagement
- Authorities approached the World Bank and the Interamerican Development Bank (IDB); negotiations advanced to secure external financing.
- Identified potential financing mix to cover financing gap (illustrative & staff estimates):
  - IMF (RFI): SDR 376.8 million (100 percent of quota; about US$500 million).
  - Other IFIs and Savings Fund (FAP) plus unidentified support to cover remaining needs.
- Government issued a USD 2.5 billion bond in late March.

### RFI justification, access, and safeguards
- Rationale:
  - RFI appropriate due to urgent balance of payments need from the global COVID-19 shock and immediate pandemic response priorities.
  - Rapid IMF involvement expected to catalyze external financing and preserve market access.
- Access and use:
  - Staff considers access of 100 percent of quota under the RFI to be appropriate (SDR 376.8 million or about US$500 million).
  - Expected use: Treasury financing for pandemic-related spending.
- Safeguards:
  - A safeguards assessment of Banco Nacional de Panama will be needed.
  - Authorities should commit to undergo a safeguards assessment before Executive Board approval of any subsequent arrangement to which the safeguards policy applies, provide Banco Nacional de Panama’s audit reports, and authorize the bank’s external auditor to hold discussions with Fund staff.
  - In the Letter of Intent, authorities confirm the Ministry of Economy and Finance will be the governmental counterpart executing timely servicing of financial obligations to the IMF.

### Debt sustainability and repayment capacity
- Staff assessment:
  - Panama is assessed as having sustainable debt and adequate capacity to repay the Fund.
  - RFI resources would represent 0.8 percent of GDP.
  - DSA (Annex I) shows debt to be sustainable with a sufficient buffer even after the pandemic’s impact.
  - Scheduled repayments of the RFI are at no point in excess of 2 percent of exports or 8 percent of reserves.
  - Panama’s sovereign credit has “investment” grade ratings from the main international credit rating agencies.

### Risks to the outlook and contingency needs
- Main risk: a greater-than-expected severity or duration of the epidemic, which would:
  - Require additional measures to strengthen domestic health services and provide support to vulnerable populations.
  - Be partially covered by further reallocation of the budget toward health and social needs and additional external financing.
  - Risk large FDI and portfolio flow reversals, exacerbating BOP needs.
- Staff assumptions and scenario notes:
  - Staff projections assume containment at moderate levels and relatively rapid activity resumption.
  - Post-COVID BOP and fiscal projections incorporate assumptions on declines in Canal receipts, Colon Free Zone re-exports, tourism, net FDI, and portfolio inflows as described in staff notes.

### Authorities’ fiscal response to COVID-19 (additional detail)
- Authorities indicated that a higher-than-budgeted deficit will be warranted in view of the unprecedented nature of the COVID-19 shock and its adverse impact on the vulnerable segments of the population.
- To expand fiscal space they:
  - Promptly sought additional financing.
  - Passed legislature allowing the government to request authorization of a higher deficit in response to the pandemic for the 2020 budget envelope.
  - Indicated that all government spending that could be reallocated, including operating and capital expenditures, will be used to focus on immediate priorities such as expanding medical capacity and the Panama Solidario social program to support the poor and the unemployed.
  - Are negotiating financial support from other multilateral institutions.

### Financial system stability and policy measures
- Authorities’ assessment:
  - The financial system was stable and reflected strong and sound financial conditions prior to the COVID-19 crisis but remains vulnerable.
  - Banks have accumulated sufficient dynamic provisioning which could be used to absorb losses from a potential increase in nonperforming loans.
  - Need to adhere to the Basel framework and guidelines on loan restructuring.
  - Authorities plan to structure a facility to strengthen and enhance banking system liquidity given the unpredictability of the pandemic’s duration.
- Staff support and recommendations:
  - Staff supports measures allowing banks to use accumulated dynamic provisioning to absorb credit losses and to restructure loans, including introducing grace periods on loan payments for affected borrowers.
  - Liquidity buffers should also be used if needed.
  - The SBP should continually monitor the situation and adjust its policy response accordingly.
  - Staff reiterates the need to recalibrate macroprudential policies to maintain a stable financial system.

### Staff appraisal, IMF support, and conditional commitments
- Short-term outlook and risks:
  - The short-term outlook has weakened considerably, and uncertainty is high.
  - Suppressed local economic activity, exacerbated by weak global activity and trade, will create fiscal and BOP financing gaps.
  - Key risks: a more severe and protracted recession, weaker-than-expected global growth, and deglobalization trends.
- Medium-term expectations:
  - Economy expected to return to its potential growth of 5 percent with inflation at 2 percent.
- IMF support:
  - Staff supports the authorities’ request for a purchase under the RFI in the amount of SDR 376.8 million (100 percent of quota).
  - Staff support is based on the severity of the COVID-19 outbreak, urgent BOP needs, and authorities’ existing policies to mitigate the external shock, including engaging the World Bank and IDB to address budgetary needs.
  - Staff welcomes the authorities’ commitment to returning to a gradual adjustment under the SFRL once the pandemic recedes to ensure public debt-to-GDP ratios remain sustainable and on a declining path.

### Fiscal and debt projections and key numbers
- Staff supports an RFI purchase of SDR 376.8 million (100 percent of quota).
- Potential growth (medium term): 5 percent.
- Inflation expectation (medium term): 2 percent.
- Consolidated Non-Financial Public Sector overall balance (incl. ACP) projections:
  - 2019: -2.6
  - 2020: -6.0
  - 2021: -2.1
  - 2022: -1.6
  - 2023: -1.6
  - 2024: -1.5
  - 2025: -1.6
- Overall balance, excluding ACP (selected years):
  - 2019: -3.1
  - 2020: -6.25
  - 2021: -2.5
  - 2022–2025: -2.0 (each year)
- Public debt of the NFPS:
  - Expected to remain sustainable, rising from 41 percent of GDP in 2019 to about 48.9 percent of GDP by 2021, then declining gradually to 44.6 percent of GDP by projection end.
- Nominal gross public debt (percent of GDP, table series):
  - 2018: 36.5
  - 2019: 36.8
  - 2020: 41.0
  - 2021: 48.5
  - 2022: 48.9
  - 2023: 47.9
  - 2024: 46.7
  - 2025: 45.6
  - (final year shown) 44.6
- Gross financing needs (GFN):
  - Averaging 6.2 percent over the projection horizon.
- Real GDP growth (selected series):
  - 2020: -2 percent (y/y).
  - Recovery: V-shaped recovery starting in 2020Q4.
  - Medium term: converge to potential of 5 percent from 2022 onwards.
- Nominal GDP growth (table series): 10.7, 4.7, 2.6, -2.9, 4.5, 6.6, 7.1, 7.1, 7.1
- Real GDP growth (table series): 6.3, 3.7, 3.0, -2.0, 4.0, 5.0, 5.0, 5.0, 5.0

### Risk assessment and stress tests
- Debt and GFN remain below the high-risk thresholds in all standardized macro-fiscal stress tests as well as in the combined macro-fiscal shock.
- Debt is vulnerable to a growth shock (namely, a slow recovery in 2021–22), which would cause gross nominal public debt to rise above 50 percent of GDP.
- The path of debt is declining under all shock scenarios in the projection horizon.
- A more protracted shock could:
  - Weaken aggregate demand for longer,
  - Lower tax revenues and increase the fiscal deficit,
  - Widen the current account deficit,
  - Lower GDP growth.
- Staff estimate of an external gap of 5.7 percent of GDP relative to the pre-COVID-19 scenario (balance of payments impact).

### Selected socioeconomic and macroeconomic indicators (as reported)
- Population (millions, 2019): 4.2
- Poverty line (percent, 2017): 20.7
- Population growth rate (percent, 2019): 1.4
- Adult literacy rate (percent, 2018): 95.4
- Life expectancy at birth (years, 2017): 78.1
- GDP per capita (US$, 2019): 15,905
- Total unemployment rate (August, 2019): 7.1
- IMF Quota (SDR, million): 376.8
- GDP (in millions of US$) (selected years):
  - 2019: 66,801
  - 2020 (Est.): 64,839
  - 2021 (Proj.): 67,786
  - 2025 (Proj.): 88,771

*Source: IMF staff Executive Summary for Panama, April 8, 2020.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Panama has been one of the most dynamic economies in Latin America over the last two decades, supported by an investment boom including the expansion of the Panama Canal.
- The strength of the economy is being tested by the outbreak of the COVID-19 global pandemic.
- The 2020 Article IV Consultation was concluded by the Executive Board on a lapse of time basis on March 24.
- Discussions for the mission took place via conference calls and videoconferences during March 27–April 7, 2020. The staff team comprised Alejandro Santos (head), Olga Bespalova, Julian Chow, and Marina Rousset (all WHD). Paola Aliperti and Madina Toshmuhamedova (WHD) assisted the team.
- Document dated April 8, 2020.

### Request for Fund support
- Authorities requested financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 376.8 million, equivalent to 100 percent of quota.
- The full amount will become available upon Board approval and will be used for budgetary support.
- Authorities stand ready to continue cooperating with the Fund in finding solutions to balance of payments and fiscal imbalances.

### Macroeconomic policies and immediate priorities
- Main short-run policy challenge: minimizing loss of human lives from COVID-19.
- Health sector actions:
  - Government declared a National Emergency.
  - Ministry of Public Health designed a plan including increasing testing and the number of hospital beds.
  - Ministry of Economy and Finance released US$50 million to buy health and hygiene supplies, advanced US$9 million to the Ministry of Health and US$1.3 million to other entities.
- Fiscal stance:
  - Change in fiscal stance with a more active use of macroprudential policies.
  - Lower tax collections and pressures on health services likely to generate a higher fiscal deficit, implying a temporary deviation from the fiscal rule.
  - National Assembly temporarily allowed the government to request a higher deficit than the Social and Fiscal Responsibility Law (SFRL) limits for 2020 amid a national emergency declaration; SFRL limits will become binding again starting in 2021.
- Financial sector measures:
  - Superintendency of Banks relaxing regulations on dynamic provisioning to improve liquidity.
  - At least 14 banks announced relief measures: grace periods of 3–4 months for loan payments, elimination of the minimum payment on credit cards, and reductions in interest rates.
  - Staff recommends enhanced liquidity monitoring (reporting deposit flows and expected outflows) and consideration of an emergency liquidity facility operated by the BNP, with access for any solvent bank using public debt instruments as collateral.
  - Temporary release of banks’ dynamic provisioning could inject some US$1.3 billion of additional liquidity (about 2 percent of GDP).

### Recent developments (pre-COVID and early 2020)
- Growth and activity:
  - Average annual growth of 6 percent over the last 25 years, but growth moderated to 3 percent in 2019.
  - Economic activity index for January 2020 was below 3 percent.
- Fiscal:
  - Fiscal deficit contained at about 3 percent of GDP in 2019 after revenue shortfalls and expenditure tightening; fiscal rule was modified in 2019.
- Financial system:
  - Banking system well capitalized, credit growth moderated sharply, NPLs remain low.
- External:
  - Current account deficit improved to 5.2 percent of GDP in 2019 (from 7.9 percent of GDP in 2018), driven by a surge in copper exports.

### Impact of COVID-19 — key staff estimates and projections
- Epidemiological and containment context (as of April 6):
  - Confirmed cases: 2,100
  - Fatalities: 55
- Economic projections (staff preliminary estimates):
  - Real GDP: projected to contract by 2 percent in 2020 (from 5 percent expected pre-shock).
  - Current account deficit: could widen to 6.8 percent of GDP in 2020 (from 5.2 percent of GDP in 2019).
  - Fiscal deficit: may increase to 6¼ percent of GDP in 2020 (from the target of 2¾ percent of GDP), surpassing SFRL limits.
- Staff quantified 2020 Pre-Post-COVID changes (percent or point differences preserved):
  - GDP growth (%): Pre-COVID 5.0, Post-COVID -2.0, Change -7.0
  - Inflation (%): Pre-COVID 1.0, Post-COVID -1.0, Change -2.0
  - Fiscal deficit: Pre-COVID 2.8, Post-COVID 6.3, Change 3.5
  - Public debt (NFPS): Pre-COVID 43.1, Post-COVID 48.5, Change 5.4
  - Credit growth (%): Pre-COVID 5.6, Post-COVID 2.0, Change -3.6
- Balance of payments impact (2020, USD and percent of GDP):
  - Estimated BOP impact of the shock for 2020: US$3.7 billion (5.7 percent of GDP).
  - Drivers of BOP gap:
    - Foreign direct investment (FDI): deterioration US$2.3 billion.
    - Current account deterioration: US$0.8 billion.
    - Portfolio investment: US$0.7 billion.
- Detailed 2020 Pre-Post-COVID BOP line items (in billions of U.S. dollars, Pre-COVID; Post-COVID; Δ):
  - Current account: -3.6; -4.4; -0.8
  - Non-oil balance: -6.6; -6.1; 0.4
  - Oil balance: -2.8; -1.5; 1.3
  - Colon Free Zone: 2.0; 1.5; -0.5
  - Tourism: 3.4; 1.7; -1.7
  - Canal receipts: 3.3; 2.5; -0.7
  - Other current: -2.9; -2.5; 0.4
  - Foreign direct investment: 5.2; 2.9; -2.3
  - Portfolio Investment: 0.9; 0.2; -0.7
  - BOP Financing gap: ...; ...; -3.7
  - (In percent of GDP) ...; ...; -5.7
  - Potential financing: ...; ...; 3.7
  - IMF (RFI): ...; ...; 0.5
  - Other IFIs: ...; ...; 0.7
  - Savings Fund (FAP): ...; ...; 0.3
  - Unidentified support: ...; ...; 2.2
- Fiscal accounts 2020 Pre-Post-COVID (In percent of GDP, Pre-COVID; Post-COVID; Δ):
  - Current revenue: 18.4; 16.7; -1.7
  - Tax revenue: 8.8; 8.0; -0.8
  - Non-tax revenue: 3.8; 2.7; -1.0
  - Other: 5.9; 5.9; 0.1
  - Expenditure: 21.2; 22.9; 1.7
  - Current: 13.4; 16.2; 2.8
  - Interest: 2.0; 2.3; 0.2
  - Capital: 5.8; 4.5; -1.3
  - Overall balance: -2.7; -6.25; -3.5
  - Overall balance (In billions U.S. dollars): ...; ...; -2.1
  - Potential financing (In billions of U.S. dollars): ...; ...; 2.1
  - IMF (RFI): ...; ...; 0.5
  - Other IFIs: ...; ...; 0.7
  - Savings Fund (FAP): ...; ...; 0.3
  - Unidentified support: ...; ...; 0.5

### Policy measures taken by authorities
- Public health and social measures:
  - Enforcement of social distancing and “sanitary fence” checkpoints outside Panama City and Colon.
  - Increasing hospital beds and importing medicines and medical equipment with additional budgetary support.
  - Strengthening “Panama Solidario” to provide US$100 per month to poor families dependent on informal jobs.
  - Suspension of payments for public services for low-income residents for four months.
  - Expanded budget support to municipalities for local healthcare needs.
- Economic measures:
  - Extension of deadlines for tax payments and reallocation of spending to priority areas.
  - Authorities adjusted state-controlled fuel prices more frequently and plan to negotiate a 5 percent reduction of electricity distribution tariffs.
  - Approved purchases of emergency food supplies.
  - The Ministry of Economy and Finance advanced budgetary allocations to speed up COVID-19-related spending.

### Financing strategy and multilateral engagement
- Authorities approached the World Bank and the Interamerican Development Bank (IDB); negotiations advanced to secure external financing.
- Identified potential financing mix to cover financing gap (illustrative & staff estimates):
  - IMF (RFI): SDR 376.8 million (100 percent of quota; about US$500 million).
  - Other IFIs and Savings Fund (FAP) plus unidentified support to cover remaining needs.

### RFI justification, access, and safeguards
- Rationale:
  - RFI appropriate due to urgent balance of payments need from the global COVID-19 shock and immediate pandemic response priorities.
  - Rapid IMF involvement expected to catalyze external financing and preserve market access.
- Access and use:
  - Staff considers access of 100 percent of quota under the RFI to be appropriate (SDR 376.8 million or about US$500 million).
  - Expected use: Treasury financing for pandemic-related spending.
- Safeguards:
  - A safeguards assessment of Banco Nacional de Panama will be needed.
  - Authorities should commit to undergo a safeguards assessment before Executive Board approval of any subsequent arrangement to which the safeguards policy applies, provide Banco Nacional de Panama’s audit reports, and authorize the bank’s external auditor to hold discussions with Fund staff.
  - In the Letter of Intent, authorities confirm the Ministry of Economy and Finance will be the governmental counterpart executing timely servicing of financial obligations to the IMF.

### Debt sustainability and repayment capacity
- Staff assessment:
  - Panama is assessed as having sustainable debt and adequate capacity to repay the Fund.
  - RFI resources would represent 0.8 percent of GDP.
  - DSA (Annex I) shows debt to be sustainable with a sufficient buffer even after the pandemic’s impact.
  - Scheduled repayments of the RFI are at no point in excess of 2 percent of exports or 8 percent of reserves.
  - Panama’s sovereign credit has “investment” grade ratings from the main international credit rating agencies.

### Risks to the outlook and contingency needs
- Main risk: a greater-than-expected severity or duration of the epidemic, which would:
  - Require additional measures to strengthen domestic health services and provide support to vulnerable populations.
  - Be partially covered by further reallocation of the budget toward health and social needs and additional external financing.
  - Risk large FDI and portfolio flow reversals, exacerbating BOP needs.
- Staff assumptions and scenario notes:
  - Staff projections assume containment at moderate levels and relatively rapid activity resumption.
  - Post-COVID BOP and fiscal projections incorporate assumptions on declines in Canal receipts, Colon Free Zone re-exports, tourism, net FDI, and portfolio inflows as described in staff notes.

*Source: IMF staff Executive Summary for Panama, April 8, 2020.*

### 18.      The authorities indicated that a higher-than-budgeted deficit will be warranted in

### 1panea2020003 - 18.      The authorities indicated that a higher-than-budgeted deficit will be warranted in

### Authorities’ fiscal response to COVID-19
- The authorities indicated that a higher-than-budgeted deficit will be warranted in view of the unprecedented nature of the COVID-19 shock and its adverse impact on the vulnerable segments of the population.
- To expand fiscal space they:
  - Promptly sought additional financing.
  - Passed legislature allowing the government to request authorization of a higher deficit in response to the pandemic for the 2020 budget envelope.
  - Indicated that all government spending that could be reallocated, including operating and capital expenditures, will be used to focus on immediate priorities such as expanding medical capacity and the Panama Solidario social program to support the poor and the unemployed.
  - Are negotiating financial support from other multilateral institutions.

### Financial system stability and policy measures
- Authorities’ assessment:
  - The financial system was stable and reflected strong and sound financial conditions prior to the COVID-19 crisis but remains vulnerable.
  - Banks have accumulated sufficient dynamic provisioning which could be used to absorb losses from a potential increase in nonperforming loans.
  - Need to adhere to the Basel framework and guidelines on loan restructuring.
  - Authorities plan to structure a facility to strengthen and enhance banking system liquidity given the unpredictability of the pandemic’s duration.
- Staff support and recommendations:
  - Staff supports measures allowing banks to use accumulated dynamic provisioning to absorb credit losses and to restructure loans, including introducing grace periods on loan payments for affected borrowers.
  - Liquidity buffers should also be used if needed.
  - The SBP should continually monitor the situation and adjust its policy response accordingly.
  - Staff reiterates the need to recalibrate macroprudential policies to maintain a stable financial system.

### Staff appraisal, IMF support, and conditional commitments
- Short-term outlook and risks:
  - The short-term outlook has weakened considerably, and uncertainty is high.
  - Suppressed local economic activity, exacerbated by weak global activity and trade, will create fiscal and BOP financing gaps.
  - Key risks: a more severe and protracted recession, weaker-than-expected global growth, and deglobalization trends.
- Medium-term expectations:
  - Economy expected to return to its potential growth of 5 percent with inflation at 2 percent.
- IMF support:
  - Staff supports the authorities’ request for a purchase under the RFI in the amount of SDR 376.8 million (100 percent of quota).
  - Staff support is based on the severity of the COVID-19 outbreak, urgent BOP needs, and authorities’ existing policies to mitigate the external shock, including engaging the World Bank and IDB to address budgetary needs.
  - Staff welcomes the authorities’ commitment to returning to a gradual adjustment under the SFRL once the pandemic recedes to ensure public debt-to-GDP ratios remain sustainable and on a declining path.

### Fiscal and debt projections and key numbers
- Authorities’ and staff’s fiscal projections and notable figures (as reported):
  - Staff supports an RFI purchase of SDR 376.8 million (100 percent of quota).
  - Potential growth (medium term): 5 percent.
  - Inflation expectation (medium term): 2 percent.
  - Consolidated Non-Financial Public Sector overall balance (incl. ACP) projections:
    - 2019: -2.6
    - 2020: -6.0
    - 2021: -2.1
    - 2022: -1.6
    - 2023: -1.6
    - 2024: -1.5
    - 2025: -1.6
  - Overall balance, excluding ACP (selected years):
    - 2019: -3.1
    - 2020: -6.25
    - 2021: -2.5
    - 2022–2025: -2.0 (each year)
- Public debt dynamics (Annex I summary):
  - Public debt of the NFPS is expected to remain sustainable, rising from 41 percent of GDP in 2019 to about 48.9 percent of GDP by 2021, reflecting unfavorable debt dynamics spurred by the pandemic-related macroeconomic shock, but declining gradually to 44.6 percent of GDP by (projection end).

### Selected socioeconomic and macroeconomic indicators (as reported)
- Population (millions, 2019): 4.2
- Poverty line (percent, 2017): 20.7
- Population growth rate (percent, 2019): 1.4
- Adult literacy rate (percent, 2018): 95.4
- Life expectancy at birth (years, 2017): 78.1
- GDP per capita (US$, 2019): 15,905
- Total unemployment rate (August, 2019): 7.1
- IMF Quota (SDR, million): 376.8
- GDP (in millions of US$) (selected years):
  - 2019: 66,801
  - 2020 (Est.): 64,839
  - 2021 (Proj.): 67,786
  - 2025 (Proj.): 88,771

*Source: IMF staff report excerpt (1panea2020003).*

### 2025. The GFN will remain moderate

### 2025. The GFN will remain moderate

### Macroeconomic outlook
- Gross financing needs (GFN) averaging 6.2 percent over the projection horizon.
- Real GDP growth:
  - 2020: -2 percent (y/y).
  - Recovery: V-shaped recovery starting in 2020Q4 (COVID-19 shock expected to lead to negative growth in 2020Q2-Q3).
  - Medium term: converge to potential of 5 percent from 2022 onwards; authorities project GDP growth will converge to around 5 percent per year.
- Inflation: expected to remain low, at around 2 percent in the medium term.
- Nominal GDP growth (table): 10.7, 4.7, 2.6, -2.9, 4.5, 6.6, 7.1, 7.1, 7.1 (years implied by table).
- Real GDP growth (table): 6.3, 3.7, 3.0, -2.0, 4.0, 5.0, 5.0, 5.0, 5.0 (years implied by table).

### Fiscal stance, deficits, and debt projections
- Overall NFPS deficit:
  - Projected to rise to 6.25 percent of GDP in 2020 as the SFRL deficit threshold is temporarily relaxed.
  - Expected to return to adherence to SFRL limits in 2021 and fall to 2 percent of GDP over the medium term.
- Medium-term fiscal path assessed as realistic.
- Public (NFPS) debt dynamics and levels (table, "Nominal gross public debt" in percent of GDP):
  - 2018: 36.5
  - 2019: 36.8
  - 2020: 41.0
  - 2021: 48.5
  - 2022: 48.9
  - 2023: 47.9
  - 2024: 46.7
  - 2025: 45.6
  - (final year shown) 44.6
- Net public debt (table) examples: 25.8, 28.2, 35.1, 36.0, 35.7, 35.2, 34.8, 34.4.
- Change in gross public sector debt (table): -0.7, 2.0, 4.3, 7.5, 0.4, -1.0, -1.2, -1.1, -1.0, 3.5 (cumulative/projection series).
- Identified debt-creating flows (table) and primary deficit series: 0.3, 1.5, 1.5, 4.2, 0.3, -0.1, 0.0, 0.0, 0.1, 4.5 (series across years).
- Debt definition: debt of the nonfinancial public sector (NFPS), which accounts for contingent liabilities of large SOEs, including ENA, ETESA and AITSA.

### Risk assessment and stress tests
- Debt and GFN remain below the high-risk thresholds in all standardized macro-fiscal stress tests as well as in the combined macro-fiscal shock.
- Debt is vulnerable to a growth shock (namely, a slow recovery in 2021–22), which would cause gross nominal public debt to rise above 50 percent of GDP.
- The path of debt is declining under all shock scenarios in the projection horizon.
- A more protracted shock could:
  - Weaken aggregate demand for longer,
  - Lower tax revenues and increase the fiscal deficit,
  - Widen the current account deficit,
  - Lower GDP growth.
- Staff estimate of an external gap of 5.7 percent of GDP relative to the pre-COVID-19 scenario (balance of payments impact).

### COVID-19 shock: impacts and policy response
- Pandemic impacts highlighted:
  - Sharp deceleration in 2020 to -2 percent (y/y).
  - Negative growth expected in 2020Q2-Q3 with recovery starting 2020Q4.
  - Significant deterioration in international trade affecting canal traffic and free trade zone activities.
  - Losses in agriculture production and tourism earnings.
  - Disruptions to transport, communications and financial services.
- Emergency fiscal and financial measures taken by authorities:
  - Creation of a "Panama Solidarity Plan" with an initial fund of US$428 million to support health care and social spending.
  - Expansion of healthcare spending.
  - Extension of tax amnesty and deadline for tax returns (from March to June).
  - Moratorium in the payment of public services (water and electricity) for 90 days.
  - Superintendence of Banks authorized the release of US$1.3 billion in commercial banks’ dynamic provisioning.
  - Banking system measures: defer payments up to three months on several categories of loans (personal, car, credit card).
- Fiscal outlook and financing needs:
  - Fiscal deficit projected to rise to 6.25 percent of GDP in 2020—over 3 percentage points of GDP higher than earlier projected.
  - Pandemic-related external shock increases imports for medical supplies, reduces tourism and canal revenue, and slows FDIs and portfolio investment, creating balance of payments strain.
- Financing actions and requests:
  - Government requests emergency financing from IMF under the Rapid Financing Instrument (RFI) in the amount of SDR 376.8 million, equivalent to 100 percent of quota.
  - RFI equivalent cited as approximately USD 515 million at current exchange rates (staff text).
  - Government issued a USD 2.5 billion bond in late March.
  - Authorities accessing World Bank and Inter-American Development Bank financing and may use their Savings Fund (FAP) as a last resource.
  - Superintendence measure to enable banks to refinance loans, grant grace periods, and reduce interest rates.

### Policy commitments and safeguards
- Authorities commit to:
  - Returning to the gradual adjustment envisaged under the Social and Fiscal Responsibility Law (SFRL) once the pandemic recedes.
  - Strengthening public financial management and ensuring effective oversight over the entire public sector.
  - Undergoing an IMF safeguards assessment in connection with the RFI; providing Banco Nacional de Panama’s most recently completed external audit reports and authorizing external auditors to discuss with IMF staff.
  - Not imposing new or intensified restrictions on current international payments and transfers, trade restrictions for BOP purposes, multiple currency practices, or entering bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement.
- Authorities’ recovery expectation:
  - Staff baseline aligned with WEO assumptions and authorities’ fiscal assumptions in 2020 and SFRL thereafter.
  - Authorities expect a “U-shaped” recovery starting in the final quarter of 2020 and an expressive rebound in 2021 led by logistics, construction, and mining sectors.

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1panea2020003.pdf_