## 1panea2021004

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### IMF Support and Program
- IMF approvals:
  - Rapid Financing Instrument (RFI) approved on April 15, 2020: amounting to 100 percent of quota, equivalent to US$0.5 billion.
  - Precautionary and Liquidity Line (PLL) approved on January 19, 2021: two-year arrangement for 500 percent of quota, equivalent to US$2.7 billion (SDR 1.9 billion).
- Purpose:
  - PLL to serve as insurance against extreme external shocks given significant downside risks to the outlook.

### Outlook, Growth, Inflation, and Risks
- Growth and output:
  - Real GDP growth: -17.9 (2020), 12.0 (2021), then 5.0 (2022–2026, each year).
  - Economy expected to rebound by 12 percent in 2021.
  - Potential annual growth over medium term: 5 percent.
- Inflation:
  - CPI (average): -1.6 (2020), 0.2 (2021), 1.1 (2022), 2.0 (2023–2026).
  - Headline inflation dropped as much as 2.5 percent (y/y) in May 2020; closed 2020 at -1.6 percent (y/y).
  - Headline inflation picked up to 1.7 percent (y/y) in April 2021 due to supply shocks in transportation.
  - Core inflation at -1.3 percent (y/y) in April 2021.
- Output gap (% of potential): 2019 = 7.3; 2020 = -14.2; 2021 = -6.3; 2022 = -4.3; 2023 = -2.3; 2024 = -0.3; 2025 = 0.0; 2026 = 0.0.
- Key downside risks and unusual uncertainties:
  - New wave of the pandemic and more contagious mutations that could reduce vaccine effectiveness.
  - Acceleration of de-globalization weakening global trade and Panama Canal traffic and revenue.
  - Setbacks in addressing remaining items in the FATF Action Plan to exit the grey list.
  - Delays in fiscal consolidation.
  - Security and climate risks: cyberattacks and climate-change related natural disasters could affect Canal activity, agriculture, and tourism.

### Pandemic Impact, Health Response, and Labor Market
- COVID-19 and vaccination:
  - Vaccination started in January 2021; reached 15 doses administered per 100 people at end-April 2021.
  - Through late May, 17.9 percent of population received at least one dose.
- Real sector impact (2020):
  - Real GDP fell by 17.9 percent (largest contraction on record).
  - Quarterly dynamics (y/y):
    - Q1-2020: growth of ½ percent.
    - Q2-2020: decline of 38¼ percent.
    - Q3-2020: GDP falling 23½ percent.
    - Q4-2020: GDP falling 11 percent.
  - Sectoral performance (2020, sector growth; contribution; share):
    - Construction: -51.9 percent, contribution -8.4 percentage points, share 46.8 percent.
    - Commerce: -19.4 percent, contribution -3.4 percentage points, share 19.2 percent.
    - Real estate: -15.5 percent, contribution -2.0 percentage points, share 11.2 percent.
    - Tourism: -55.8 percent, contribution -1.2 percentage points, share 6.8 percent.
    - Manufacturing: -22.0 percent, contribution -1.1 percentage points, share 6.1 percent.
    - Transportation: -6.2 percent, contribution -0.9 percentage points, share 4.9 percent.
    - Other services: -46.2 percent, contribution -0.7 percentage points, share 4.1 percent.
    - Mining: 34.1 percent, contribution 0.8 percentage points, share -4.6 percent.
    - Other sectors: -3.5 percent, contribution -1.0 percentage points, share 5.5 percent.
  - Monthly indicator: fell 9¾ percent (y/y) in February 2021.
- Labor market:
  - Unemployment rose from 7 percent in August 2019 to 18½ percent in September 2020.
  - 284,029 labor contracts were suspended in 2020 (almost 15 percent of the labor force).
  - As of March 2021, 140,080 contracts reactivated (almost ½ of suspended contracts).
  - Staff estimate: unemployment could have declined from 18.5 percent to 15½ percent in March 2021 based on reactivations; may decline to around 7 percent by end-2021 under projected growth.

### Fiscal Policy Recommendations and Medium-Term Strategy
- Medium-term fiscal strategy:
  - Modified fiscal rule accommodates pandemic shock short run while ensuring long-run debt sustainability.
  - Primary balance projected to strengthen from a primary deficit of over 7¾ percent of GDP in 2020 to a primary surplus of ½ percent of GDP in 2025.
  - This compares to a medium-term debt-stabilizing primary deficit of 1¼ percent of GDP.
- Revenue mobilization and tax policy:
  - Tax revenue to GDP ratio was 8¼ percent in 2019.
  - Tax expenditure estimated between 3 and 4 percent of GDP in 2016; phasing out around ¼ of tax expenditures could yield additional revenues.
  - Lowering the tax evasion ratio to averages of similar-income countries could increase tax collection by up to 2 percent of GDP (staff estimate).
  - Modernization strategy for the tax authority (DGI) designed in early 2020; progress slowed by pandemic but should resume.
- Expenditure prioritization:
  - Contain growth of primary expenditure and lower it as a share of GDP, facilitated by withdrawal of COVID-19 expenditure in 2022 (some 2 percent of GDP).
  - Reorient expenditure towards social and infrastructure spending; public spending on education is among the lowest in the region.
- Pensions:
  - Two defined benefit schemes face sustainability challenges absent policy measures; reserves of the first scheme expected to deplete in the next few years.
- Fiscal rule credibility:
  - Once anchor reached, embed a safety margin for cyclical surprises; margin could consider historical GDP volatility, cyclical position, sensitivities, and macro/fiscal risks.
- Fiscal planning tools:
  - Medium-term fiscal framework (for 2022 budget) should include sound revenue projections, rigorous costing, and explicit linkages between revenue policy, expenditure needs, and deficit targets.

### Banking Sector Resilience, Measures, and Recommendations
- Pandemic-related measures:
  - Temporary moratorium on servicing bank loans: originally through end-2020 and de facto extended to mid-2021 via voluntary loan restructuring, grace periods, interest rate reductions.
  - Fund for Economic Stimulus (FES) established in August 2020 as a lender-of-last-resort-like facility; as of mid-May 2021 liquidity under FES had not been drawn by any bank.
  - FES became fully operational since August 2020; a first-time safeguards assessment of the BNP completed in September 2020 and most recommendations implemented.
- Banking indicators:
  - Bank loans declined 2.2 percent in 2020.
  - Deposits grew 8.1 percent in 2020, largely due to government deposits.
  - Capital adequacy ratio increased to 15.7 percent at end-2020 (from 15.2 at end-2019).
  - Liquid assets covered 64 percent of deposits as of end-February 2021 (and liquid assets to total assets: 2019 = 12.8; 2020 = 17.6).
  - Modified loans from the moratorium amounted to US$23 billion (40 percent of total loans) in one section; elsewhere modified portfolio peaked at US$28.1 billion in August 2020 and decreased to US$19.6 billion in late April 2021.
  - Delinquency rate of domestic loans: 4.5 percent at end-March 2021; 4.4 percent at end-2019 in one section; elsewhere NPLs reported as 2.0 percent end-2019 and 2.0 percent end-2020; and NPLs reported at 1.9 percent by end-March 2021 in another table.
  - Return on equity declined to 6.5 percent in 2020 (from 15.3 percent in 2019).
  - Total loan-loss provision increased to 148 percent of NPL in 2020 (from 102 percent in 2019); banks had made provision of 3.5 percent of the gross modified loan portfolio, on average; ad hoc regulatory requirement mandated banks to create a provision equivalent to 3 percent of the gross modified loan portfolio.
- Stress-test findings (SBP):
  - Under slow recovery: delinquency could increase to 14.8 percent; additional provisioning of 6 to 7 percent of the gross modified loan portfolio could be required; average capital adequacy ratio could decline to 13 percent (from 15.7 percent at end-2020).
  - Smaller banks (assets up to US$1 billion) most affected but on average remain above regulatory threshold.
- Recommendations:
  - Maintain tight, risk-focused supervision given large share of modified loans.
  - Phase-in Basel III liquidity coverage ratio (LCR) and implement net stable funding ratio (NSFR) post-crisis.
  - Strengthen AML/CFT supervision capacity, systemic risk monitoring, stress testing, cybersecurity, and fintech regulatory frameworks.
  - Phase out debt relief measures as pandemic recedes with supervisory action plan and close monitoring.
  - Formalize crisis management plan, implement capital conservation buffers, introduce additional requirements for systemically important banks, expand macroprudential toolkit.
  - Authorities drafting a bill on banking resolution with IMF technical assistance; implement Basel III capital conservation buffer.

### External Position, Reserves, and External Debt Sustainability
- Current account and external flows:
  - Current account balance: 2019 = -5.0; 2020 = 2.3; 2021 = -3.4; 2022 = -3.3; 2023 = -3.1; 2024 = -2.8; 2025 = -2.6; 2026 = -2.5.
  - Switch to surplus of 2¼ percent of GDP in 2020 from deficit of 5 percent in 2019, driven by contraction in imports, lower oil prices, increased copper exports, and resilient canal and CFZ revenues.
  - FDI inflows: 5.5 percent of GDP in 2019 → 1.2 percent of GDP in 2020.
- Reserves and liquidity:
  - Gross international reserves (end-period, millions US$): 2019 = 4,375; 2020 = 9,936; 2021 = 10,982; 2022 = 11,566.
  - Reserves in months of imports of goods and services: 2019 = 3.0; 2020 = 5.1; 2021 = 5.2; 2022 = 5.1.
  - Net foreign assets of BNP increased from 5 percent of GDP in 2019 to 16 percent of GDP in 2020.
  - Central government deposit at commercial banks corresponded to 4.5 months of central government expenditures in 2020.
  - Sovereign Wealth Fund (SWF) about 2 percent of GDP in foreign assets abroad.
  - Liquid assets in banking sector covered about 60 percent of deposits in 2020.
- External debt:
  - Gross external debt (percent of GDP): 2019 = 156.8; 2020 = 201.9; 2021 = 186.3; 2022 = 185.3; 2023 = 182.7; 2024 = 178.8; 2025 = 176.8; 2026 = 175.2.
  - NFPS external debt (percent of GDP): 2019 = 35.3; 2020 = 55.1; 2021 = 54.2; 2022 = 54.4.
- External outlook:
  - Current account projected to deteriorate temporarily in 2021 to -3½ percent of GDP driven by pent-up demand for imported durable goods, then to -2½ percent of GDP by 2026 as exports strengthen.
- DSA and stress scenarios:
  - Baseline: public debt peaks at 64 percent of GDP in 2020 and declines to 56½ percent of GDP in 2026 under amended fiscal rule baseline.
  - Gross financing needs peak at 15¼ percent of GDP and shrink to 5¾ percent of GDP in 2026.
  - Stress scenarios breaching 70 percent debt threshold:
    - One-standard deviation two-year growth shock → debt to GDP 82 percent in 2023.
    - Crystallization of contingent liabilities from banking sector bailouts equal to 10 percent of outstanding credit to the private sector → debt to GDP 94 percent in 2023.
  - Only contingent liability shock breaches the 15 percent of GDP gross financing needs benchmark (by 10 percent of GDP) in 2022.

### Financial Integrity, FATF Action Plan, and Tax Transparency
- FATF status and action plan:
  - Panama on FATF grey list since June 2019.
  - Panama criminalized tax evasion as a predicate offense to money laundering in 2019.
  - FATF identified low levels of effectiveness in several Immediate Outcomes (IOs).
  - Agreed action plan (June 2019) addressing IO-1, IO-3, IO-5, IO-7.
  - Original timeline: reforms by September 2020 and January 2021; deadlines expired due to change of administration and pandemic.
  - Panama reaffirmed commitment in February 2021 FATF plenary; FATF urged addressing strategic deficiencies “as soon as possible”.
  - Exiting FATF grey list is a top priority; government hired international experts and cooperating with GAFILAT.
- Tax transparency and international standards:
  - Panama ratified the Multilateral Instrument on BEPS (MLI).
  - Implemented Common Reporting Standard (CRS) effective September 30, 2020 for a list of 66 countries; non-automatic exchanges with 161 jurisdictions.
  - EU kept Panama on blacklist of non-cooperative jurisdictions for tax purposes in February 2021.
  - Global Forum has not yet rated Panama “largely compliant” with Exchange of Information on Request; latest review published in 2019 assessing practices in 2018.
  - Panamanian Tax Code largely territorial; staff encourage gradual move towards worldwide taxation of passive and some active incomes to adjust for digitalization and raise revenues.

### Public Financial Management, Procurement, Arrears, and Transparency
- Arrears:
  - New government identified unrecorded and unpaid Central Government arrears before 2019 worth US$1.7 billion, of which around US$0.6 billion due to suppliers/contractors.
  - Bulk of these arrears paid by end-2020.
  - Authorities committed to preventing new buildup; developed Action Plan with Fund technical assistance.
- Action Plan building blocks (two-year):
  - Develop full-fledged medium-term budget with multi-year expenditure ceilings.
  - Enhance investment project database coverage and integration in budget preparation.
  - Adopt an Organic Budget Law to enshrine multiannual budgeting.
  - Strengthen legal sanctions for unappropriated spending.
  - Interface budget systems with public contracts and bills tracking to account for arrears.
- Fiscal reporting and accounting basis:
  - Quarterly fiscal reports should reflect operating and financing transactions in GFS format and analyze compliance with projections.
  - Evolve hybrid accounting system towards full accrual to capture accrued costs of deferred payment projects.
  - Publish consolidated end-year financial statements for the non-financial public sector.
  - Include fiscal risk statement in the Medium-Term Fiscal Framework.
- Procurement reforms (Law 153/2020):
  - Introduced online offers, electronic verification, less discretionary committee selection, raised offer bail threshold from B/.50,000 to 500,000, narrowed price modification ranges, and transparent processes for minor purchases.
  - Panama Compra website augmented with dedicated COVID-19 procurement section.
  - Beneficial ownership disclosure limited: companies with contracts above US$500,000 required to disclose beneficial owners to government but Supreme Court ruled information cannot be publicly disclosed.
- Transparency of COVID-19 spending:
  - Presidency’s website discloses Panama Solidario spending; MEF publishes reports occasionally; Panama Compra provides procurement data.
  - Recommendations: produce dedicated COVID-19 spending reports at least quarterly with disaggregated data; publish ex-post audits (Supreme Comptroller has not published dedicated audit on COVID-19 spending).

### Social, Labor, and Inclusion Policies
- Social outcomes and vulnerable populations:
  - World Bank projects poverty rates to increase by at least 3½ percentage points, especially in rural areas.
  - Disproportionate impact on women, indigenous people, and socioeconomic minorities in tourism, construction, logistics, and commerce.
  - Pandemic disrupted health and education services and increased domestic and gender violence incidence during lockdowns.
- Labor market measures:
  - Suspension of labor contracts used as stabilizer under Article 199 and Law 157 (extended to December 31, 2020); Law 201 (Feb 25, 2021) mandates gradual reinstatement and protections.
  - Vale Digital voucher: US$120 per month to eligible individuals since March 2020; benefited almost 300,000 households (over 1 million people).
  - Eligibility: employers register furloughs via digital portal; benefits activated upon approval.
- Policy priorities:
  - Reduce informality—employment support programs target formal sector.
  - Create childcare centers in government facilities to reduce labor force participation gap and help women join labor market.
  - Consider aligning salary adjustments with productivity; ease restrictions on foreign employment to foster knowledge sharing.
  - Enhance efficiency of social spending, centralize beneficiary registry, strengthen education and technical training, and improve living conditions in comarcas.

### Statistics, Data Dissemination, and SDDS Plans
- Statistical system and planned actions:
  - Further consultation with users and communication across data agencies recommended.
  - Complete updates to national accounts benchmark and CPI weights.
  - Improve data dissemination practices to subscribe to SDDS; Panama has e-GDDS experience since 2000.
  - Authorities plan to embrace ROSC recommendations, update National Statistical Plan 2020-24, modernize INEC, increase INEC resources, and strengthen National Statistical Council.
  - With increased efforts and resources, Panama should meet SDDS requirements by 2022.

### Convergence, Productivity, and Structural Reform Priorities
- Convergence metrics:
  - WEO PPP per capita pre-pandemic: $31,600 (international dollars of 2017).
  - Convergence ratio: 0.5 in 2017-19.
  - Staff projects recovery of 2019 convergence level by 2026 under current projections.
- Potential growth and TFP scenarios:
  - Staff estimates potential growth at 5 percent per annum.
  - Upside: if TFP shifts from -½ to +½ percent, potential growth could increase from 5 to 6 percent per annum.
  - If growth increases to 6 percent in second half of decade, Panama could achieve convergence ratio of 0.6 by 2030.
- Growth accounting (percent):
  - Labor: 1990-99 = 1.9; 2000-09 = 1.7; 2010-19 = 0.8; 2020-24 = 0.7; 2025-29 = 0.7.
  - Human Capital: 1990-99 = 0.4; 2000-09 = 0.3; 2010-19 = 0.2; 2020-24 = 0.2; 2025-29 = 0.2.
  - Capital: 1990-99 = 2.9; 2000-09 = 2.9; 2010-19 = 7.2; 2020-24 = 3.9; 2025-29 = 4.7.
  - TFP: 1990-99 = 0.4; 2000-09 = 0.7; 2010-19 = -2.0; 2020-24 = -3.0; 2025-29 = -0.6.
  - GDP: 1990-99 = 5.6; 2000-09 = 5.6; 2010-19 = 6.2; 2020-24 = 1.8; 2025-29 = 5.0.
- Structural reform recommendations:
  - Improve education quality, business environment, labor market flexibility, insolvency framework, innovation, infrastructure, and disaster resilience to raise productivity and avoid middle-income trap.

### Staff Appraisal and Authorities’ Views
- Authorities broadly agreed with staff’s outlook and risk assessment; cautiously optimistic for 2021+ emphasizing copper production, Canal traffic, and recovery in private investment and tourism.
- Authorities prioritize exiting FATF grey list, fiscal consolidation, cybersecurity and climate risks, and public financial management improvements.
- Staff appraisal highlights:
  - Economy poised for strong rebound in 2021; risks include FATF delays, increase in NPLs from loan moratorium, setbacks in fiscal consolidation, and pandemic re-emergence.
  - Strengthening fiscal framework and PFM transparency essential; publication of time series adjusted by past unrecorded and accrued arrears is important.
  - Financial sector resilient but requires tight supervision and calibrated phase-out of regulatory forbearance.
  - Social priorities: address inequities, enhance health and education spending efficiency, and improve conditions in comarcas and women’s economic opportunities.

*Source: IMF staff report excerpts (1panea2021004, May 24, 2021).*

### 0.4 billion) to address immediate balance of payments needs, which the IMF Executive

### 1panea2021004 - 0.4 billion) to address immediate balance of payments needs, which the IMF Executive

### IMF Support and Program
- IMF approvals:
  - Rapid Financing Instrument (RFI) approved on April 15, 2020: amounting to 100 percent of quota, equivalent to US$0.5 billion.
  - Precautionary and Liquidity Line (PLL) approved on January 19, 2021: two-year arrangement for 500 percent of quota, equivalent to US$2.7 billion (SDR 1.9 billion).
- Purpose of PLL: serve as insurance against extreme external shocks given significant downside risks to the outlook.

### Outlook and Risks
- Baseline growth projection:
  - Economy expected to rebound by 12 percent in 2021.
- Downside risks and unusual uncertainties related to the pandemic remain:
  - External risks:
    - Acceleration of de-globalization could weaken global trade and curtail recovery in the Panama Canal’s traffic flow and revenue.
  - Domestic risks:
    - Setbacks in addressing remaining items in the FATF Action Plan to exit the grey list.
    - Delays in fiscal consolidation.
    - A prolonged pandemic could exacerbate socio-economic hardship and derail economic policies and the recovery.

### Policy Advice and Priorities
- Short-term priorities:
  - Support the recovery of the economy and intensify vaccination of the population.
  - Maintain adequate financial system liquidity to finance the economic expansion.
  - Phase out temporary forbearance measures once the pandemic recedes.
  - Promptly implement measures to exit the FATF grey list to support confidence and Panama’s status as a regional financial center.
- Fiscal policy:
  - Fiscal consolidation is taking place only gradually following the revised fiscal responsibility law.
- Medium-term priorities:
  - Intensify structural reforms to improve competitiveness, reduce poverty and inequality, and address climate risks to support healthy and inclusive growth and preserve Panama’s competitive advantage as an attractive destination for business.

### Pandemic, Economic Shock, and Recovery Dynamics
- COVID-19 and containment:
  - Panama’s containment and vaccination efforts mitigated infection rates; vaccination started in January 2021 and reached 15 doses administered per 100 people at end-April 2021.
  - At some point Panama had one of the highest COVID fatality rates in the world.
- Real sector impact:
  - Real GDP in 2020: fell by 17.9 percent (largest economic contraction in recorded history).
  - Quarterly dynamics in 2020:
    - Q1-2020: growth of ½ percent, y/y.
    - Q2-2020: decline of 38¼ percent, y/y.
    - Q3-2020: GDP falling 23½ percent, y/y.
    - Q4-2020: GDP falling 11 percent, y/y.
  - Sectoral performance in 2020 (contribution to Real GDP Growth):
    - Construction: -51.9 percent (growth), contribution -8.4 percentage points, share 46.8 percent.
    - Commerce: -19.4 percent, contribution -3.4 percentage points, share 19.2 percent.
    - Real estate: -15.5 percent, contribution -2.0 percentage points, share 11.2 percent.
    - Tourism: -55.8 percent, contribution -1.2 percentage points, share 6.8 percent.
    - Manufacturing: -22.0 percent, contribution -1.1 percentage points, share 6.1 percent.
    - Transportation: -6.2 percent, contribution -0.9 percentage points, share 4.9 percent.
    - Other services: -46.2 percent, contribution -0.7 percentage points, share 4.1 percent.
    - Mining: 34.1 percent, contribution 0.8 percentage points, share -4.6 percent (note: mining expanded by ⅓).
    - Other sectors: -3.5 percent, contribution -1.0 percentage points, share 5.5 percent.
  - Monthly indicator of economic activity: fell 9¾ percent (y/y) in February 2021.
  - Labor market: unemployment rose from 7 percent in August 2019 to 18½ percent in September 2020; most of the increase were furloughed workers.

### Inflation and Price Developments
- Inflation trajectory:
  - Headline inflation: dropped as much as 2.5 percent (y/y) in May 2020; closed 2020 at -1.6 percent (y/y).
  - Core inflation: similar negative trend, with core inflation at -1.3 percent (y/y) in April 2021.
  - Headline inflation picked up to 1.7 percent (y/y) in April 2021 due to supply shocks in transportation.

### Fiscal Developments and Public Debt
- NFPS fiscal outcomes:
  - NFPS fiscal deficit: rose from 3½ percent of GDP in 2019 to 10 percent of GDP in 2020.
  - The 2020 fiscal outcome aligned with the amended Social and Fiscal Responsibility Law (SFRL) which sets deficit objectives between 9 and 10½ percent of GDP in 2020 and targets a gradual consolidation to reach an NFPS deficit of 1½ percent of GDP from 2025 onwards.
  - NFPS debt: rose from 42¼ percent of GDP in 2019 to 64 percent of GDP in 2020.
    - About half of the increase reflects the higher fiscal deficit; the other half reflects the GDP drop and the strong buildup of public sector deposits.
- 2020 budget execution (In billions of U.S. dollars):
  - Revenues: Budget 13.1; Actual 9.8; Δ -3.3.
  - Expenditures: Budget 15.1; Actual 15.1; Δ 0.0.
  - Primary current spending: Budget 9.9; Actual 11.0; Δ 1.1.
  - Non-COVID related spending: Budget 9.9; Actual 9.5; Δ -0.5.
  - COVID-related spending: Budget -; Actual 1.6.
    - Panama Solidario: 1.1.
    - Health and security: 0.3.
    - Electricity subsidy: 0.2.
  - Interest payments: Budget 1.5; Actual 1.4; Δ -0.1.
  - Capital expenditure: Budget 3.7; Actual 2.7; Δ -1.0.
  - Fiscal Deficit: Budget -2.0; Actual -5.3; Δ -3.3.
- Policy measures:
  - COVID-19 related spending about 3 percent of GDP was broadly offset by cuts in capital expenditure about 2 percent of GDP and other current spending about 1 percent of GDP.
  - Tax amnesty on tax liabilities accrued until June 2019 was extended until December 2021; in February 2021 the government announced measures to reduce penalties.

### Natural Disasters and Fiscal Response
- Hurricane and storm impacts:
  - Hurricane Eta (November 5, 2020) and tropical storm Iota (November 17, 2020) caused floods and landslides affecting agricultural production.
  - Authorities declared a state of emergency and allocated US$100 million to support the affected population.
  - Economic losses were contained mainly to the agricultural sector.

*Source: IMF staff report excerpt (May 24, 2021).*

### 8.      The impact of the large pandemic shock

### 8.      The impact of the large pandemic shock

### Banking sector resilience and policy measures
- Government and banking community agreed on a temporary moratorium on servicing bank loans, originally through end-2020 and then (de facto) extended to mid-2021, implemented via voluntary loan restructuring, grace periods, and in some cases interest rate reduction.
- A Fund for Economic Stimulus (FES) was established in August 2020, resembling a lender of last resort (LOLR) facility, to safeguard financial stability by providing timely liquidity and credit in times of financial stress.
- As of mid-May 2021, liquidity under the FES had not been drawn by any bank.
- Bank sector indicators:
  - Bank loans declined only 2.2 percent in 2020, driven by lower credit to the corporate sector.
  - Deposits grew 8.1 percent in 2020, largely driven by large build-up in government deposits.
  - Capital adequacy ratio increased to 15.7 percent at end-2020 (from 15.2 at end-2019).
  - Liquid assets covered 64 percent of deposits as of end-February 2021.
- The Superintendency of Banks (SBP) allowed using dynamic provisions amounting to US$1.3 billion (about 2 percent of GDP); only five banks used such provisions and for smaller amounts than allowed.
- The FES became fully operational since August 2020. A first-time safeguards assessment of the BNP was completed in September 2020 and most recommendations were implemented, including strengthened criteria for selection and appointment of external auditors and enhanced investment practices. Work continues to reinforce internal audit and finalize the legal framework for the FES.

### Credit cycle and financial indicators
- Real credit growth, liquidity indexes, interest rates, interest spreads, and capital ratios remained consistent with a resilient banking sector under stress (figures and charts presented in source).
- Credit gap and trend indicators show the impact of the pandemic shock on real credit growth (visual data in source).

### External position and outlook
- The current account balance switched to a surplus of 2¼ percent of GDP in 2020 (from a deficit of 5 percent of GDP in 2019) due to a sharp contraction in imports, lower oil prices, increased copper exports, and resilient canal and CFZ revenues.
- The external position is assessed to be moderately stronger than the level implied by fundamentals and desirable policy settings.
- Sovereign spreads are below the average of emerging economies with similar credit rating.
- Projected external developments:
  - The external position is projected to deteriorate temporarily in 2021 to a current account deficit of about 3½ percent of GDP, driven by higher pent-up demand for imported durable goods.
  - The current account deficit is projected to fall to 2½ percent of GDP by 2026 as export receipts strengthen.

### Macroeconomic outlook and key projections
- Economic activity:
  - Output growth is projected to rebound to 12 percent in 2021.
  - Over the medium term, growth is expected to stabilize at a potential annual rate of 5 percent.
- Inflation:
  - Inflation is expected to moderate to ½ percent (y/y) by end-2021 and stabilize at 2 percent over the medium term.
- Fiscal and public debt projections (selected figures from Medium-Term Macroeconomic Outlook table):
  - Real GDP growth: -17.9 (2020), 12.0 (2021), then 5.0 (2022–2026).
  - CPI inflation (average): -1.6 (2020), 0.2 (2021), 1.1 (2022), 2.0 (2023–2026).
  - Overall balance (NFPS): -10.1 percent of GDP (2020), -7.4 percent of GDP (2021), progressing to -1.5 percent of GDP (2025–2026).
  - Structural primary balance: -4.7 percent of GDP (2020), -3.3 percent of GDP (2021), improving to 0.5 percent of GDP (2025).
  - Public debt (gross, NFPS): 64.0 percent of GDP (2020), 62.9 percent of GDP (2021), declining to 56.4 percent of GDP (2026).
  - Public debt (net): 41.2 percent of GDP (2020), 44.0 percent of GDP (2021), 41.7 percent of GDP (2026).
  - Current account balance: 2.3 percent of GDP (2020), -3.4 percent of GDP (2021), moving to -2.5 percent of GDP (2026).
  - Private credit growth: -2.6 percent (2020), 12.3 percent (2021), then around 7.1 percent (2023–2026).

### Fiscal impacts, policy framework, and recommendations
- 2021 fiscal outlook and measures:
  - The 2021 budget is aligned with a reduction of the NFPS deficit to almost 7½ percent of GDP, consistent with the amended Social and Fiscal Responsibility Law (SFRL).
  - Deficit reduction drivers: rebound in revenues (1¼ percent of GDP) and moderation of spending (1½ percent of GDP).
  - Composition of expenditures amended in early 2021 to reprioritize spending by 1¼ percent of GDP towards vaccines and social programs while reducing other spending.
  - COVID spending could amount to over 2 percent of GDP in 2021.
  - NFPS debt expected below 63 percent of GDP in 2021 (from 64 percent the year before), mainly due to robust growth.
- Medium-term fiscal strategy:
  - The modified fiscal rule accommodates the pandemic shock in the short run while ensuring long-run debt sustainability.
  - Over time, the primary balance is projected to strengthen from a primary deficit of over 7¾ percent of GDP in 2020 to a primary surplus of ½ percent of GDP in 2025 (and beyond).
  - This compares favorably with the medium-term debt-stabilizing primary deficit of 1¼ percent of GDP and places public debt on a downward trajectory from its 2020 peak of 64 percent of GDP.
- Fiscal planning and revenue mobilization:
  - The medium-term fiscal framework (expected for the 2022 budget) should be a central planning tool, with sound revenue projections, rigorous costing of projects and programs, and explicit linkages between revenue policy, expenditure needs, and deficit targets.
  - Tax policy recommendations:
    - Tax revenue to GDP ratio was 8¼ percent in 2019—almost half the average of Latin American countries with similar income levels.
    - Tax expenditure was estimated between 3 and 4 percent of GDP in 2016 and mostly benefits the highest income deciles; phasing out around ¼ of tax expenditures could yield additional revenues.
    - Detailed tax expenditure reports would enhance transparency and support a reform roadmap.
    - Some tax rates could be gradually adjusted in the medium term to raise revenues and increase progressivity to cover costs of spending priorities (education and health) and facilitate consolidation.
  - Tax administration:
    - Lowering the tax evasion ratio to the average of countries with similar income could increase tax collection by up to 2 percent of GDP, per staff estimates.
    - A modernization strategy for the tax authority (DGI) was designed in early 2020; progress slowed due to the pandemic but should resume.
  - Customs authority (ANA) developed a strategic plan for operational improvements via digitalization, infrastructure, and capacity building; adjustments needed in performance indicators and transparency.
- Expenditure prioritization:
  - Contain the growth of primary expenditure and lower it as a share of GDP, facilitated by withdrawal of COVID-19 expenditure in 2022 (some 2 percent of GDP).
  - Reorient expenditure towards social and infrastructure spending; public spending on education is among the lowest in the region.
- Pensions:
  - Two existing defined benefit schemes will likely face sustainability challenges absent policy measures.
  - The first scheme (applicable to workers older than 35 in 2005) is expected to deplete its reserves in the next few years.
  - The defined benefit component of the mixed system introduced in 2005 will face longer-run pressures, with reserves peaking in about two decades and declining thereafter.
- Tax amnesty:
  - The latest amnesty bill was announced in February 2021. Amnesty may reduce informality but is unfair and lacks evidence of raising long-run revenues; careful communication is necessary to prevent expectations of future amnesties.
- Fiscal rule credibility:
  - Once the medium-term deficit anchor is reached, authorities could embed a safety margin for cyclical surprises to avoid excessive use of escape clauses.
  - The margin calculation could consider historical GDP volatility, cyclical position, cyclical sensitivities of revenues and expenditures, and macroeconomic/fiscal risks.

### Risks and uncertainties
- Balance of risks remains tilted to the downside with unusual uncertainty from:
  - New wave of the pandemic and more contagious mutations that could reduce vaccine effectiveness.
  - Escalation of external risks: disruptions of global trade and capital flows affecting Canal and logistics sectors.
  - FATF grey list: lack of meaningful progress on AML/CFT could lead to countermeasures affecting correspondent banking relationships.
  - Security and climate risks: cyberattacks could cause significant disruptions; climate-change related natural disasters could adversely affect Canal activity, agriculture, and tourism.

### Authorities’ views
- Authorities broadly agreed with staff’s outlook and risk assessment.
- They were cautiously optimistic for 2021 and beyond, emphasizing full-scale copper production, Canal traffic volume and revenue, and recovery in private investment and tourism as medium-term growth drivers.
- Authorities prioritize exiting the FATF grey list, supporting fiscal consolidation, and addressing cybersecurity and climate risks.
- Authorities agreed with staff’s assessment of public debt sustainability and external stability.
- Public financial management:
  - The government has embarked on an action plan to improve budget preparation, expenditure control, and accounting practices to avoid arrears.
  - Progress is being monitored within a working group with IMF staff participation.

*Source: IMF staff chapter "8.      The impact of the large pandemic shock" (1panea2021004).*

### Annex VIII). Progress in the PFM framework should include improvements in the statistical and

### 1panea2021004 - Annex VIII). Progress in the PFM framework should include improvements in the statistical and

### Public Financial Management, Transparency, and Procurement
- Progress in the PFM framework should include improvements in the statistical and analytical content of fiscal reports (reflecting full accrual accounting and integrating timely information on COVID-19 spending).
- Presentation of NFPS consolidated financial statements should be improved.
- Inclusion of fiscal risk statements in the Fiscal Strategy Report is recommended.
- A new law on Public Procurement (Law 153/2020) approved in September 2020 has made contracting processes more transparent.
- The dedicated procurement website https://www.panamacompra.gob.pa/Inicio/#!/ provides more comprehensive information on all types of contracts including those related to COVID-19.
- While the website provides information by contract on the name of the companies and their capital subscribers, the full information on beneficial owners is not always disclosed.
  - Companies with contracts above US$500,000 are required to disclose the name of their beneficial owners to the government but the Supreme Court has ruled that the information cannot be publicly disclosed for privacy reasons. The government can disclose the information on beneficial owners to the relevant agencies in case of a criminal investigation.
- Transparency on the execution information of COVID-19 expenditure should be reinforced, and ex-post audits on it should be conducted and published.

### Authorities’ Views — Fiscal Policy and Budget Framework
- The authorities are committed to fiscal discipline and are prepared to improve budgetary procedures.
- They are working to develop a fiscal strategy based on:
  - enhanced revenue administration,
  - broadening of tax bases,
  - prioritization of expenditure allocations towards socially critical areas and infrastructure,
  - containing other spending.
- They concur that the strategy should be reinforced by a robust multiannual budget framework with safeguards against arrears accumulation (including clearer sanctions).
- They are adopting an action plan for improving budget preparation and expenditure control and are in the process of drafting an Organic Budget Law to replace the current annual budget laws and enshrine a medium-term budget framework.

### Financial Integrity and FATF Action Plan
- Panama has been on the Financial Action Task Force (FATF) grey list since June 2019.
- Panama strengthened its legal framework, including introducing legislation to criminalize tax evasion as a predicate offense to money laundering in 2019.
- FATF designated Panama as a “jurisdiction with strategic deficiencies” due to low levels of effectiveness identified in several Immediate Outcomes (IOs).
- Panama agreed on an action plan with FATF in June 2019 including specific commitments addressing:
  - (i) national and sectoral ML/TF risks (IO-1);
  - (ii) supervision and sanctions against AML/CFT violations (IO-3);
  - (iii) verification and update of beneficial ownership information of legal persons and arrangements (IO-5);
  - (iv) investigation and prosecution of ML involving foreign tax crimes (IO-7).
- Original timeline: implementing all necessary reforms by September 2020 and January 2021.
- Change of administration in July 2019 and the COVID-19 pandemic impeded progress; agreed-upon deadlines have expired.
- Panama reaffirmed commitment to implementing remaining items during the February 2021 FATF plenary meeting; FATF urged addressing strategic deficiencies “as soon as possible”.
- Exiting the FATF grey list is a top priority; the government hired international experts and is cooperating with GAFILAT.

### Tax Transparency and International Standards
- Panama ratified the Multilateral Instrument on Base Erosion and Profit Shifting (MLI).
- Panama implemented the Common Reporting Standard (CRS) for automatic exchange of information.
  - Government mandated financial institutions to report all relevant fiscal information to the authorities of a list of 66 countries (including the EU 27), effective September 30, 2020.
  - Non-automatic exchanges of information are held with another 161 jurisdictions.
- Government amended various special regimes considered harmful by the EU.
- Despite progress, in February 2021 the EU decided to keep Panama on the blacklist of non-cooperative jurisdictions for tax purposes.
  - The Global Forum has not yet rated Panama as “largely compliant” with the Exchange of Information on Request; latest review published in 2019 assessing practices in force in 2018.
- Outside the amended regimes, the Panamanian Tax Code is largely based on territoriality, preventing taxation of active and passive income not taxed abroad.
- Authorities are encouraged to gradually move towards a system of worldwide taxation of passive and some active incomes (such as services that residents offer online) to adjust for the digitalization era and raise revenues.

### Banking System Resilience and COVID-19 Measures
- Panama’s banking system remained resilient and well-regulated during the pandemic despite challenges from the moratorium on servicing bank loans through end-December 2020 and de facto extension through end-June 2021 for loan modification.
- Regulatory capital adequacy ratio:
  - 15.7 percent as of end-2020 (compared to 15.2 percent as of end-2019), against a minimum of 8 percent.
- Modified loans arising from the moratorium amounted to US$23 billion (40 percent of total loans).
- Delinquency rate of domestic loans:
  - 4.5 percent at end-March 2021, compared to 4.4 percent at end-2019.
- Ad hoc regulatory requirement mandated banks to create a provision equivalent to 3 percent of the gross modified loan portfolio.
  - Total loan-loss provision increased to 148 percent of NPL in 2020 (from 102 percent of NPL in 2019).
  - Banks had made provision of 3.5 percent of the gross modified loan portfolio, on average.
- Returns on equity declined to 6.5 percent in 2020 (from 15.3 percent in 2019).
- Stress test by the SBP assuming a slow recovery in 2021 showed:
  - delinquency rate could increase to 14.8 percent,
  - an additional provisioning of 6 to 7 percent of the gross modified loan portfolio could be required for loans under the moratorium,
  - average capital adequacy ratio could decline to 13 percent (from 15.7 percent at end-2020).
  - Smaller banks (with assets of up to US$1 billion) are most affected, but their capital adequacy ratio, on average, would remain above the regulatory threshold.
- Net claims from the external sector on banks (mostly foreign deposits) amounted to 2.5 percent of GDP in 2019, indicating vulnerability to large-scale deposit withdrawals by foreigners.

### Supervisory, Macroprudential, and Crisis-Management Recommendations
- Financial system should remain under tight supervision given the large share of modified loans.
  - A risk-focused loan portfolio examination of all banks, including assessment of fundamental asset quality, once the pandemic recedes would help assess credit exposures and capital buffers.
- SBP should continue phasing-in Basel III liquidity coverage ratio (LCR) and implement the net stable funding ratio (NSFR) once the COVID crisis is over.
- SBP should strengthen capacity for AML/CFT supervision, systemic risk monitoring and stress testing, and implement robust cybersecurity and fintech regulatory frameworks.
- Phasing out debt relief measures is necessary as the pandemic recedes; moratorium/modification should be restricted to specified categories and phased out with a supervisory action plan and close monitoring.
- Authorities could formalize a crisis management plan, implement key Basel III capital conservation buffers, introduce additional capital requirements for systemically important banks, and expand the macroprudential policy toolkit.
- Authorities are drafting a bill on banking resolution for troubled banks (with IMF technical assistance).
- Regulatory-supervisory approach for 2021–23 will focus on:
  - implementing the capital conservation buffer,
  - treatment of interest rate risk in the banking book,
  - enhancing stress testing and the Internal Capital Adequacy and Assessment (ICAAP) process,
  - corporate governance.
- Authorities plan to implement the Basel III capital conservation buffer.

### Statistics and Data Dissemination
- Panama has a sound macroeconomic statistical system that could be further strengthened.
- Key actions:
  - further consultation with users and communication across data producing agencies,
  - complete updates to the national accounts benchmark and CPI weights.
- Additional investment would help improve data dissemination practices to subscribe to the Special Data Dissemination Standard (SDDS).
  - Panama has experience with the e-GDDS (since 2000); improvements in timeliness, periodicity, and coverage of a few data categories would support SDDS subscription.
- Authorities’ plans:
  - embrace ROSC recommendations and commit to statistical improvement, including subscription to the SDDS by 2022;
  - update the National Statistical Plan for 2020-24,
  - modernize the National Institute of Statistics and Census (INEC), increase INEC resources, and strengthen the National Statistical Council to improve coordination and oversee statistical reform.
- With increased efforts and resources, Panama should meet SDDS requirements by 2022. Resource planning will be critical in addition to the ongoing Census and GDP rebasing.

### Staff Appraisal — Outlook, Risks, and Policy Priorities
- Economy poised to rebound strongly in 2021, recovery broad-based and supported by full-scale copper production and higher private demand.
- Key risks:
  - delays in addressing FATF recommendations and improving AML/CFT and tax transparency frameworks;
  - increase in NPLs prompted by the loan moratorium;
  - setbacks in fiscal consolidation jeopardizing market confidence and sovereign credit rating;
  - re-emergence of the pandemic triggered by new virus strains or short effectiveness of vaccines.
- Fiscal policy:
  - Staff welcomes recently amended fiscal rule enshrining a path of gradual fiscal consolidation towards a medium-term deficit anchor of 1½ percent of GDP and providing a margin for countercyclical policies in the short run.
  - Adherence to this path would keep public debt on a sustainable path, with a steady decline of debt to GDP from its peak in 2020 (64 percent of GDP) to 56½ percent in 2026.
- PFM and transparency:
  - Strengthening the fiscal framework is essential to improving credibility of the fiscal strategy.
  - Staff assigns great importance to publication of time series of fiscal balances adjusted by past unrecorded and accrued arrears, as well as associated liabilities.
- FATF priorities:
  - Exiting the FATF grey list must remain a priority.
  - Priority commitments include addressing national and sectoral ML/TF risks, supervision and sanctions against AML/CFT violations, verification and update of beneficial ownership information of legal persons and arrangements, and investigation and prosecution of ML involving foreign tax crimes.
- Financial sector:
  - Financial sector remains resilient but tight supervision and monitoring are needed to safeguard stability.
  - Regulatory forbearance should be restricted to explicitly set categories and phased out; ad hoc provisioning requirement on modified loans should be continually recalibrated in line with evolving circumstances.
  - A risk-focused loan portfolio examination of all banks once the pandemic recedes would help assess credit exposures and capital buffers.
- Social priorities:
  - Addressing social inequities with budgetary resources is urgent.
  - Staff supports government goals of enhancing efficiency of spending, particularly in health, education and social areas, and prioritizing country-appropriate and fiscally-sustainable strategies to reduce inequality, improve living conditions in the comarcas, and enhance women’s economic opportunities.

*IMF staff appraisal and authorities’ views as presented in the source text.*

### 45. It is recommended that the next Article IV consultation takes place on the standard

### 1panea2021004 - 45. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

### Institutional recommendation
- It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

### Socio-economic indicators (selected findings)
- PPP GDP Per Capita, 2020: Panama ranks highest among comparators in the chart (index shown up to "30,000" PPP GDP per Capita (In PPP dollars) with PAN at the top of the listed series).
- GINI Index (2019 vs 2010): charted values indicate persistent inequality; chart labels include country ordering with PAN among higher-inequality comparators.
- Unemployment: Total unemployment rate (Sep, 2020) = 18.5.
- Labor force participation (2019): charted by Female / Male / Total; Panama shown comparable to regional peers.
- Infant mortality (Per 1,000 live births, 2019): Panama shown comparable to regional peers in chart.
- Life expectancy at birth (years, 2018) = 78.3.
- Population (millions, 2020) = 4.3.
- Poverty line (percent, 2017) = 20.7.
- Population growth rate (percent, 2020) = 1.4.
- Adult literacy rate (percent, 2018) = 95.4.
- GDP per capita (US$, 2020) = 12,373.

### Real sector: recession and recovery projections
- Real GDP growth:
  - 2019 = 3.0
  - 2020 = -17.9
  - 2021 (Est.) = 12.0
  - 2022–2026 (Projections) = 5.0, 5.0, 5.0, 5.0, 5.0 (each year)
- Output gap (% of potential):
  - 2019 = 7.3
  - 2020 = -14.2
  - 2021 = -6.3
  - 2022 = -4.3
  - 2023 = -2.3
  - 2024 = -0.3
  - 2025 = 0.0
  - 2026 = 0.0
- Demand components (selected):
  - Private consumption: 2019 = 3.6; 2020 = -15.7; 2021 = 12.3; 2022 = 4.5; 2023 = 2.8; 2024 = 4.0; 2025 = 4.8; 2026 = 4.5
  - Private investment: 2019 = -2.8; 2020 = -40.0; 2021 = 33.7; 2022 = 12.4; 2023 = 6.8; 2024 = 7.1; 2025 = 6.2; 2026 = 6.7
  - Exports: 2019 = -0.1; 2020 = -28.3; 2021 = 15.3; 2022 = 11.0; 2023 = 9.3; 2024 = 7.5; 2025 = 8.4; 2026 = 7.0
  - Imports: 2019 = -3.3; 2020 = -34.0; 2021 = 34.0; 2022 = 6.5; 2023 = 6.9; 2024 = 5.7; 2025 = 6.9; 2026 = 8.6
- Prices:
  - CPI (average): 2019 = -0.4; 2020 = -1.6; 2021 = 0.2; 2022 onward = 1.1, 2.0, 2.0, 2.0, 2.0
  - CPI (end-of-year): 2019 = -0.1; 2020 = -1.6; 2021 = 0.5; 2022 onward = 2.0 (each year 2022–2026)

- Sectoral impacts in 2020:
  - All sectors except mining contracted in 2020; construction contributed the most to the contraction.
  - Employment growth collapsed in 2020; services sector most affected.

### Fiscal developments and projections
- Consolidated Non-Financial Public Sector (NFPS) overall balance (incl. ACP):
  - 2019 = -3.2 (percent of GDP)
  - 2020 = -8.9
  - 2021 = -6.7
  - 2022 = -3.3
  - 2023 = -2.6
  - 2024 = -1.7
  - 2025 = -1.1
  - 2026 = -0.8
- NFPS revenue and expenditure (percent of GDP):
  - Revenue 2019 = 18.5; 2020 = 18.6; 2021 = 19.6; 2022 = 20.1; 2023 = 20.7; 2024 = 21.0; 2025 = 21.1; 2026 = 21.2
  - Expenditure 2019 = 22.1; 2020 = 28.6; 2021 = 27.0; 2022 = 24.2; 2023 = 23.7; 2024 = 23.0; 2025 = 22.7; 2026 = 22.7
- COVID-19 related NFPS expenditure:
  - Shown as 3.0 (2019), 2.2 (2020) in Table 2 heading "o/w COVID-19 related expenditure" and then 0.0 for subsequent years.
- Public investment (NFPS, percent of GDP):
  - 2019 = 5.5; 2020 = 5.1; 2021 = 4.3; 2022 = 4.5; 2023 = 4.5; 2024 = 4.5; 2025 = 4.6; 2026 = 4.8
- Total public debt (NFPS; percent of GDP):
  - 2019 = 42.2
  - 2020 = 64.0
  - 2021 = 62.9
  - 2022 = 62.5
  - 2023 = 61.7
  - 2024 = 60.2
  - 2025 = 58.3
  - 2026 = 56.4
- Central government gross debt (percent of GDP):
  - 2019 = 47.6
  - 2020 = 70.8
  - 2021 = 68.9
  - 2022 = 68.2
  - 2023 = 67.1
  - 2024 = 65.2
  - 2025 = 62.9
  - 2026 = 60.8
- NFPS net financing (percent of GDP):
  - 2020 = 4.8 (net financing)
  - 2021 = 7.4
  - 2022 = 4.0
  - 2023 = 3.0
  - 2024 = 2.0
  - 2025 = 1.5
  - 2026 = 1.5

### Banking sector soundness and financial sector indicators
- Non-performing loans (NPLs) to total gross loans (end-period, percent):
  - 2019 = 2.0
  - 2020 = 2.0
- Provisioning (chart shows provisioning increased with adoption of stricter provisioning requirements).
- Profitability:
  - Return on assets: 2019 = 1.8; 2020 = 0.7
  - Return on equity: 2019 = 15.3; 2020 = 6.5
- Capital adequacy:
  - Regulatory capital to risk weighted assets: 2019 = 15.2; 2020 = 15.7
  - Capital Adequacy Ratio (charts) remain above regulatory minimum.
- Liquidity indicators:
  - Liquid assets to total assets: 2019 = 12.8; 2020 = 17.6
  - Liquid assets to short-term liabilities: 2019 = 37.0; 2020 = 47.0
- Credit developments:
  - Private sector credit (annual percent change): 2019 = 2.4; 2020 = -2.6; 2021 = 12.3; 2022 = 6.1; 2023 = 7.1; 2024 = 7.1; 2025 = 7.1; 2026 = 7.1
  - Credit growth in 2020 slowed significantly, driven mostly by weak lending to the private sector and particularly to nonfinancial corporates; commerce and construction were major contributors to the credit deceleration.

### Macrofinancial indicators and spreads
- Domestic interest rates:
  - Average deposit rate (2020) = 1.9; 2021 = 1.6; projected 2022–2024 = 1.6 each year; 2025 = 2.0; 2026 = 2.0
  - Average lending rate (2020) = 7.8; 2021 = 6.2; projected 2022–2024 = 6.2 each year; 2025 = 6.6; 2026 = 6.6
- Sovereign spreads:
  - EMBIG Spreads chart: Panama among the lowest in the region across 2004–2021 series.

### External sector: current account, trade, and external debt
- Current account balance (percent of GDP):
  - 2019 = -5.0
  - 2020 = 2.3
  - 2021 = -3.4
  - 2022 = -3.3
  - 2023 = -3.1
  - 2024 = -2.8
  - 2025 = -2.6
  - 2026 = -2.5
- Merchandise trade (excluding CFZ, percent of GDP):
  - Exports, f.o.b. (2019) = 8.9; (2020) = 8.7; (2021) = 10.8
  - Imports, f.o.b. (2019) = 23.0; (2020) = 17.0; (2021) = 21.7
- Colón Free Zone (CFZ) net exports (percent of GDP):
  - 2019 = 2.7; 2020 = 3.2; 2021 = 2.7
  - Re-exports, f.o.b. (2020) = 13.3; (2021) = 13.4
- Services balance and Panama Canal:
  - Services, net (2019) = 13.2; (2020) = 10.4; (2021) = 10.8
  - Canal (contribution to services/exports): 2019 = 4.8 (percent of GDP for Canal); 2020 = 6.5; 2021 = 6.1
- External debt (Gross external debt, percent of GDP):
  - 2019 = 156.8 (Table 1)
  - 2020 = 201.9
  - 2021 = 186.3
  - 2022 = 185.3
  - 2023 = 182.7
  - 2024 = 178.8
  - 2025 = 176.8
  - 2026 = 175.2
- NFPS external debt (percent of GDP):
  - 2019 = 35.3
  - 2020 = 55.1
  - 2021 = 54.2
  - 2022 = 54.4
- Gross international reserves (end-period, millions of U.S. dollars):
  - 2019 = 4,375
  - 2020 = 9,936
  - 2021 = 10,982
  - 2022 = 11,566
- Reserves in months of imports of goods and services:
  - 2019 = 3.0
  - 2020 = 5.1
  - 2021 = 5.2
  - 2022 = 5.1

### External vulnerability indicators (selected)
- Current account improved in 2020 to a surplus: 2020 = 2.3 (percent of GDP).
- REER: the REER depreciated in 2020 relative to 2019 amid low inflation in Panama relative to peers (charted series; Table 8 notes REER percent change with negative values indicating depreciation).
- Key ratios (Table 8):
  - Broad money (12-month percent change): 2020 = 9.5; 2021 = 15.2; 2022 = 7.1
  - Private sector credit (12-month percent change): 2020 = -2.6; 2021 = 12.3; 2022 = 6.1
  - Non-Financial Public Sector external debt (percent of GDP): 2020 = 55.1; 2021 = 54.2; 2022 = 54.4
  - Gross international reserves (in percent of broad money): 2020 = 21.3; 2021 = 20.4; 2022 = 20.1
  - Gross international reserves (in percent of short-term external debt): 2020 = 27.9; 2021 = 30.5; 2022 = 33.4

### Key projection snapshots (selected macro variables)
- Real GDP growth: 2021 = 12.0; 2022–2026 = 5.0 each year.
- CPI (average): 2021 = 0.2; 2022 = 1.1; 2023–2026 = 2.0 each year.
- NFPS total public debt: 2021 = 62.9; 2022 = 62.5; 2023 = 61.7; 2024 = 60.2; 2025 = 58.3; 2026 = 56.4 (percent of GDP).
- Current account (percent of GDP): 2021 = -3.4; 2022 = -3.3; 2023 = -3.1; 2024 = -2.8; 2025 = -2.6; 2026 = -2.5.

*Source: IMF staff calculations and national authorities as compiled in the Panama Article IV staff report (figures, tables, and projections contained in the provided content).*

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

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

### Overall summary
- The authorities’ macroeconomic and financial policies remained broadly in line with past Fund advice in 2020, with appropriate adjustments for the COVID-19 shock.
- Authorities strengthened the credibility of their fiscal framework by amending the SFRL to accommodate health spending and revenue shortfalls.
- Progress continues on the FATF action plan.
- Remaining weaknesses: Panama needs to further strengthen tax collections, expenditure controls, fiscal transparency, and the effectiveness of the AML/CFT regime.

### 1. Fiscal Policy
- Findings:
  - Fiscal policy remains anchored in the SFRL, which was streamlined in October 2018 and further modified in response to the pandemic, in line with IMF recommendations.
  - A bill created the fiscal council—an independent committee tasked with providing technical analysis of fiscal policy—following staff recommendations.
  - Members of the Council remain to be appointed, and the institution remains to be staffed and provided capacity development.
  - Measures to monitor fiscal risks and contingent liabilities are still in their early stages.
  - Authorities are in the process of quantifying tax policy options recommended by IMF Technical Assistance and formulating a medium-term revenue framework.
  - Implementation of recent advice on revenue administration has started, but so far has been limited.
- Policy implications / recommendations (implied by findings):
  - Complete appointment, staffing, and capacity development for the fiscal council.
  - Advance development and implementation of measures to monitor fiscal risks and contingent liabilities.
  - Finalize and operationalize the medium-term revenue framework and implement revenue-administration reforms.

### 2. Financial Integrity and Tax Transparency
- Findings:
  - Authorities continue addressing gaps identified in Panama’s AML/CFT framework by FATF and GAFILAT.
  - Panama criminalized tax evasion in 2019 and further enhanced its legislative framework in 2020, in line with staff advice and FATF requirements.
  - The pace of reforms was slowed by the onset of the pandemic.
  - To exit the FATF grey list and strengthen its regulatory framework, Panama needs to demonstrate the effectiveness of its AML/CFT regime and urgently tackle the remaining items on the FATF action plan.
- Policy implications / recommendations:
  - Urgently address remaining items on the FATF action plan.
  - Demonstrate effectiveness of the AML/CFT regime through implementation and enforcement.
  - Continue strengthening tax transparency measures and international information exchange.

### 3. Financial Sector Reforms
- Findings:
  - Prudential regulations have been largely aligned to Basel III.
  - The Basel III capital adequacy framework was implemented in 2018.
  - The LCR will be gradually phased-in in line with staff advice.
  - A draft legislation to strengthen the bank resolution framework, which would expedite the resolution process (taking into account IMF recommendations), has been submitted to the Cabinet for deliberation.
  - Once approved by the National Assembly, this framework will override the chapter on bank resolution in the Banking Law.
  - Panama is collaborating with other SECMCA member countries to develop a national and regional crisis preparedness and management plan.
- Policy implications / recommendations:
  - Approve and implement the strengthened bank resolution framework to expedite resolution processes.
  - Continue phasing in the LCR and maintain alignment with Basel III standards.
  - Advance national and regional crisis preparedness and management planning with SECMCA partners.

### 4. Structural Reforms
- Findings:
  - Reform implementation has been delayed amid the COVID-19 health crisis.
  - Delays affect education, labor market flexibility, social safety nets, and infrastructure development.
  - Authorities agree with staff advice, but implementation has been slow.
- Policy implications / recommendations:
  - Resume and accelerate implementation of structural reforms once conditions allow.
  - Prioritize reforms that support recovery and enhance productivity: education, labor market flexibility, social safety nets, and infrastructure.

*Source: 1panea2021004 - Annex I. Implementation of Past IMF Policy Advice*

### 7.8 percent. Overall, given that the REER has not depreciated much

### 1panea2021004 - 7.8 percent. Overall, given that the REER has not depreciated much

### REER gap and exchange rate assessment
- Staff assesses the 2020 REER gap to be in the range of 0 to -8 percent, noting that the REER has not depreciated much since 2017.
- Figure and indices presented: PAN NEER, US REER, PAN REER, US NEER (Index, 2012=100, +appreciation).

### Capital and Financial Accounts: flows and assessment
- Background findings:
  - FDI inflows declined from 5.5 percent of GDP in 2019 to 1.2 percent of GDP in 2020, mainly due to lower reinvested earnings of large multinational companies.
  - Portfolio investment inflows increased due to large bond issuance by the government.
- Assessment and medium-term outlook:
  - Over the medium term, the current account deficit is expected to remain adequately financed by FDI.
  - Panama’s role as a maritime and air transportation hub and regional financial center, paired with macroeconomic stability, is expected to continue to attract substantial investment.
  - Sustainability of the current account deficit depends in part on profitability and reinvestment behavior of multinational companies; any decline in FDI receipts would likely be offset by a reduction of outflows in the primary income account, limiting the overall impact on Panama’s ability to finance imports.

### FX intervention, reserves level, and liquidity buffers
- Background and measurement:
  - Panama is a fully dollarized economy and does not have its own currency or central bank.
  - Reserve adequacy assessment is based on adequacy of liquidity buffers to cover external obligations of the government and banking sector; the standard ARA metric is inappropriate because of lack of authority control over banks’ foreign exchange liquidity.
  - For statistical purposes, international reserves historically measured as net foreign assets of the National Bank of Panama (BNP) and the Ministry of Economy and Finance.
  - Net foreign assets of BNP increased from 5 percent of GDP in 2019 to 16 percent of GDP in 2020, mainly as a result of international bond issuance by the central government.
- Assessment and key liquidity indicators:
  - Panama’s reserve level is adequate.
  - The central government deposit at commercial banks corresponded to 4.5 months of central government expenditures in 2020, well above best practice of 1 month of expenditure.
  - Panama has a Sovereign Wealth Fund (SWF) of about 2 percent of GDP in foreign assets abroad.
  - Liquid assets in the banking sector covered about 60 percent of deposits in 2020, nearly double the minimum statutory requirement of 30 percent.
  - Banks’ short-term assets cover 3/4 of banks’ short-term liabilities.

### External debt sustainability and public sector DSA — baseline and scenarios
- Baseline public debt and financing projections:
  - Public debt peaks in 2020 at 64 percent of GDP and steadily declines to 56½ percent of GDP in 2026 under the amended fiscal rule baseline.
  - Primary balance improves from a 7¾ deficit in 2020 to a ½ surplus in 2026.
  - Gross financing needs peak at 15¼ percent of GDP and gradually shrink to 5¾ percent of GDP in 2026, slightly below the 2010–18 average of 6½ percent of GDP.
  - Net borrowing concentrated in medium- and long-term instruments (global bonds and multilateral debt).
  - Full access to international markets at a low spread on US debt is expected in the baseline.
- Stress scenarios and risk thresholds:
  - Debt-to-GDP would breach the 70 percent threshold under two shocks:
    - A one-standard deviation two-year growth shock drives debt to GDP to 82 percent in 2023.
    - Crystallization of contingent liabilities from banking sector bailouts equal to 10 percent of outstanding credit to the private sector raises debt to 94 percent in 2023.
  - In both above scenarios, debt to GDP eventually declines after 2023.
  - Calibrated shocks on real interest rates, primary balance, and the real exchange rate would keep debt below the 70 percent threshold.
  - Only the contingent liability shock would breach the 15 percent of GDP gross financing needs benchmark (by 10 percent of GDP) in 2022, its year of occurrence.
- Public sector DSA detailed projections and indicators (selected figures from tables and figures):
  - Nominal gross public debt: 36.3 (2019), 42.2 (2020), 64.0 (2021), 62.9 (2022), 62.5 (2023), 61.7 (2024), 60.2 (2025), 58.3 (2026) (in percent of GDP as reported in panel).
  - Public gross financing needs: 6.3 (2019), 8.1 (2020), 15.3 (2021), 11.4 (2022), 7.4 (2023), 6.1 (2024), 7.7 (2025), 4.8 (2026) (in percent of GDP).
  - Real GDP growth (projections): 6.5 (2019), 3.0 (2020), -17.9 (2021), 12.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025), 5.0 (2026) (in percent).
  - Inflation (GDP deflator): 3.5 (2019), -0.2 (2020), -3.4 (2021), 0.2 (2022), 1.1 (2023), 2.0 (2024), 2.0 (2025), 2.0 (2026) (in percent).
  - Effective interest rate: 5.6 (2019), 5.2 (2020), 5.0 (2021), 5.4 (2022), 4.4 (2023), 4.3 (2024), 4.1 (2025), 3.9 (2026) (in percent).
  - Cumulative change in gross public sector debt (projection): -0.4 (2019), 4.9 (2020), 21.8 (2021), -1.1 (2022), -0.4 (2023), -0.8 (2024), -1.5 (2025), -1.9 (2026), -1.8 (cumulative through period), -7.6 (ending reported).
  - Identified debt-creating flows and components (selected):
    - Primary deficit contributions, and automatic debt dynamics decomposed into real interest rate and real GDP growth contributions are reported across 2019–2026 in the tables and figures.
- Alternative scenario assumptions (selected values shown in figure A4.2):
  - Baseline underlying assumptions (in percent): Real GDP growth 12.0 (2021), 5.0 (2022–2026); Inflation 0.2 (2021), 1.1 (2022), 2.0 (2023–2026); Primary Balance -4.5 (2021), -1.7 (2022), -0.8 (2023), 0.1 (2024), 0.5 (2025), 0.4 (2026); Effective interest rate 5.4 (2021), 4.4 (2022), 4.3 (2023), 4.1 (2024), 4.0 (2025), 3.9 (2026).
  - Historical scenario, constant primary balance scenario, and contingent liability shock assumptions are presented for comparison in the same figure.
- Risk assessment visual summary:
  - Heat map and predictive density charts present vulnerabilities across shocks (Real Interest Rate Shock, External Financing Requirements, Real GDP Growth Shock, Primary Balance Shock, Exchange Rate Shock, Contingent Liability Shock).
  - Benchmarks used in risk assessment include bond spreads of 200 and 600 basis points; external financing requirement thresholds of 5 and 15 percent of GDP; annual change in share of short-term debt thresholds of 0.5 and 1 percent; public debt held by non-residents thresholds of 15 and 45 percent; share of foreign-currency denominated debt thresholds of 20 and 60 percent.
  - Market perception indicators reported include EMBIG and 5Y CDS spreads (EMBIG: 168 bp in the panel as of reporting period; 5Y CDS: 68 bp).

*Source: IMF staff.*

### Annex V. Economic Convergence of Panama

### Annex V. Economic Convergence of Panama

### Background and convergence metric
- WEO estimates per capita GDP in Panama, adjusted for purchasing power parity (PPP), at $31,600 before the pandemic (measured in international dollars of 2017).
- Panama reached a convergence ratio of 0.5 in 2017-19 (ratio of country per capita GDP, PPP, to U.S. per capita GDP, PPP).
- The convergence ratio doubled relative to three decades earlier but remains lower than most AEs.
- WEO notes three main metrics considered for AE classification: (i) per capita income level; (ii) export diversification; and (iii) degree of integration into the global financial system.

### Latin America experience and risks of divergence
- Historically, Latin America has made little or no progress converging to U.S. per capita GDP.
- Examples of divergence:
  - Mexico: convergence ratio 0.5 in 1981-82; 0.32 by 2019.
  - Argentina and Venezuela: convergence ratios around 0.7 in mid-1970s, followed by sharp divergence over the next half-century; Argentina now similar to Mexico, Venezuela similar to Nicaragua.
- Panama also experienced a divergence episode from 1975 to 1989 when the convergence ratio fell from 0.38 to 0.24.

### Advanced Economies experience and benchmarks
- As of WEO classifications there are 39 AEs globally; 21 were AEs in 1989 and 18 economies were added between 1990 and 2016.
- Excluding extreme values, on average an economy is considered advanced when the convergence ratio is about 0.6; some economies obtained AE status with lower ratios.
- Six economies were given AE status with convergence ratios similar to Panama in 2019: Estonia, Korea, Latvia, Lithuania, Slovak Republic, and Taiwan Province of China.
- Two current AEs have lower convergence ratios than Panama in 2019: Greece and Latvia.

### Panama’s growth outlook and scenarios
- Staff estimates Panama’s potential growth rate at 5 percent per annum.
- Real GDP declined about 18 percent in 2020 due to the pandemic.
- Current Staff projections indicate the convergence level achieved in 2019 will only be recovered by 2026.
- Upside potential: if TFP shifts from -½ to +½ percent (consistent with experience in the 1990s and 2000s), potential growth would increase from 5 to 6 percent per annum.
- If growth is increased to 6 percent in the second half of the decade, by 2030 Panama would have achieved a convergence ratio of 0.6.

### Structural reforms recommended to raise productivity and growth
- Undertake reforms to increase productivity, including:
  - (i) advancing the quality of education to improve the effectiveness of the labor force;
  - (ii) improving the business environment to continue attracting high levels of investment;
  - (iii) facilitating the absorption of foreign talent to increase human capital;
  - (iv) fostering innovation to adopt better technologies;
  - (v) reducing institutional vulnerabilities to enhance the overall functioning of the economy.

### Growth accounting (percent) — historical and projection components
- Labor:
  - 1990-99: 1.9
  - 2000-09: 1.7
  - 2010-19: 0.8
  - 2020-24: 0.7
  - 2025-29: 0.7
- Human Capital:
  - 1990-99: 0.4
  - 2000-09: 0.3
  - 2010-19: 0.2
  - 2020-24: 0.2
  - 2025-29: 0.2
- Capital:
  - 1990-99: 2.9
  - 2000-09: 2.9
  - 2010-19: 7.2
  - 2020-24: 3.9
  - 2025-29: 4.7
- TFP:
  - 1990-99: 0.4
  - 2000-09: 0.7
  - 2010-19: -2.0
  - 2020-24: -3.0
  - 2025-29: -0.6
- GDP:
  - 1990-99: 5.6
  - 2000-09: 5.6
  - 2010-19: 6.2
  - 2020-24: 1.8
  - 2025-29: 5.0

### Key conclusions
- Panama’s pre-pandemic convergence ratio (0.5) places it in a position comparable to economies (at earlier dates) that later transitioned to AE status, but sustained high growth and productivity improvements are required to reach AE thresholds.
- The short-term setback from an 18 percent decline in real GDP in 2020 delays recovery of the 2019 convergence level until 2026 under current Staff projections.
- Turning TFP around and implementing structural reforms could raise potential growth to 6 percent per annum in the second half of the decade and reach a convergence ratio of 0.6 by 2030.

*Source: Annex V. Economic Convergence of Panama, IMF staff.*

### Annex VIII. Strengthening the Fiscal Framework

### Annex VIII. Strengthening the Fiscal Framework

### Arrears prevention and stock-taking
- The new government elected in 2019 identified unrecorded and unpaid Central Government arrears before 2019 worth US$1.7 billion, of which around US$0.6 billion was due to suppliers or contractors.
- The bulk of these arrears had been paid by end-2020.
- The authorities committed to preventing new buildup of arrears and developed an Action Plan (based on technical assistance from the Fund) after identifying main factors explaining arrears accumulation.

### Action Plan: building blocks to address domestic arrears
- The Action Plan spans a two-year period and is structured around:
  - Developing a full-fledged medium-term budget that sets multi-year expenditure ceilings and ensures that carryovers, when authorized on an exceptional basis, are appropriated in next year’s budget.
  - Enhancing the coverage and structure of the investment project database and ensuring its adequate use in budget preparation and its interfacing with the information system, to fully factor and transparently disclose the present and future costs of public investment.
  - Adopting an Organic Budget Law with superior legal status to provide a comprehensive scope on fiscal policy-making and the budget process, including by enshrining a multiannual budgeting framework.
  - Strengthening legal sanctions for spending unappropriated amounts.
  - Interfacing the budget information system with IT applications tracking public contracts and bills, and ensuring that arrears are properly accounted even if they stem from unappropriated expenditure.
- The authorities are encouraged to continue refining publication of fiscal accounts adjusted by these arrears.

### Fiscal transparency, reporting, and the accounting basis
- Recommended improvements:
  - Quarterly fiscal reports should reflect operating and financing transactions in a GFS format, and provide an analysis on compliance with fiscal projections and performance drivers.
  - The present hybrid accounting system should evolve towards a full accrual one, to capture accrued costs of turnkey and other deferred payment projects.
  - Publish consolidated end-year financial statements for the non-financial public sector.
  - Include an updated breakdown of multi-annual costs of public investment by individual project, new and under execution.
  - Incorporate a fiscal risk statement into the Medium-Term Fiscal Framework (Marco Presupuestario a Medio Plazo), covering macroeconomic and specific risks emanating from SOEs or explicit contingent liabilities, as well as a public debt sustainability analysis.
- Footnote details retained in source:
  - The current reporting system is close to an accrual one but excludes accrued costs of deferred payment projects.
  - Some deferred-payment projects (particularly those undertaken before 2019, worth US$3.4 billion) roughly follow a linear payment schedule and may not generate large discrepancies between the hybrid system and pure accrual.
  - Projects in preparation (worth close to US$200 million) will be paid in two installments, at 50 percent of their execution and at their completion; these could be more problematic for accurate representation of the fiscal deficit under the current system, and their accrued costs could be imputed according to their execution rate.

### Procurement system reforms and transparency of beneficiaries
- Progress under Law 153/2020 (in force since end-September 2020):
  - Possibility of presenting offers online and electronic administrative verification of documents.
  - Less discretionary selection of evaluating committee members.
  - Elimination of indicative bands around the reference price to encourage competition.
  - Contract value threshold above which offer bails are required raised from B/.50,000 to 500,000.
  - Use of arbitrage for dispute settlement and narrowing of ranges for contract price modification from 40 to 25 percent.
  - Minor purchases (below B/.10,000) now through a transparent online quotations system rather than bilateral contacts.
  - Purchases under the exceptional procedure above B/.300,000 must consider at least 3 offers.
  - Panama Compra procurement website enriched with a dedicated section on COVID-19 purchases and online quotations for minor purchases; planned expansion to include documentation of the whole procurement process.
- Limitations on disclosure of direct beneficiaries:
  - Full information on direct beneficiaries is only requested as a pre-requirement for companies bidding for contracts above B/.500,000.
  - According to past decisions of the Supreme Court, that beneficiary information is not disclosed.

### Transparency of COVID-19 spending: current practice and recommended enhancements
- Current practices:
  - The Presidency’s website discloses data on cumulative spending under the program Panama Solidario.
  - The MEF occasionally publishes dedicated and more comprehensive reports on COVID spending.
  - Panama Compra provides specific data on procurement related to COVID-19 spending.
- Recommended reinforcements:
  - Produce dedicated COVID-19 spending reports more frequently (at least on a quarterly basis) with more disaggregated data on executing departments and the economic classification of spending.
  - Budget execution and fiscal reports should single out timely and accurately COVID-19 spending, and capture all in-year spending reallocations approved to finance it within the expenditure ceilings.
  - The Supreme Comptroller (Contraloria) has not published any dedicated audit report on COVID-19 spending; publishing such an audit report is highly recommendable given the streamlined ex-ante procedures that applied to most purchases.

*Source: Annex VIII. Strengthening the Fiscal Framework*

### 3.      Efforts to limit disruptions caused by natural disasters should continue to focus on

### 3.      Efforts to limit disruptions caused by natural disasters should continue to focus on 

### Natural disaster resilience: strategic priorities and tools
- Efforts should continue to focus on three areas: structural, financial, and post-disaster resilience.  
- Panama has achieved marked progress in these areas.  
- Recommendation: prepare a Disaster Resilience Strategy (DRS) based on a multi-year macro-fiscal framework with input from stakeholders to provide development partners a comprehensive guide to authorities’ needs and plans and to facilitate coordination of support.  
- Recommendation: undertake a Climate Change Policy Assessment (CCPA) to provide an overarching assessment of the country’s climate strategies and to help build coherent macro-frameworks to respond to climate change.  
- Notable implementation example: The Panama Canal Authority introduced a freshwater surcharge for ships in transit, raising over US$200 million in 2020 for water management projects.  
- International commitment context: Panama, along with 110 countries, has communicated an intention to achieve ‘carbon neutrality’ (net-zero carbon emissions) by 2050. The text notes that existing targets do not appear to be aligned with the net zero objective and may need to be increased in the future.  

### Labor market response to the COVID-19 shock: measures, outcomes, and next steps
- Context: dollarized economy with rigid labor market; no unemployment insurance.  
- Policy innovation: authorities deployed suspension of labor contracts and targeted transfers to ease pandemic impact, acting as an automatic stabilizer in 2020.  
- Legal basis and reforms:
  - Article 199 of The Panama Labor Code allows suspension of employment contracts for a maximum term of four months under emergency conditions.  
  - Law 157 of August 3, 2020 extended suspension terms until December 31, 2020 and added protections (e.g., non-discrimination during reinstatement; calculation of seniority and compensation based on previous 6 months or last monthly salary).  
  - Executive Decree 81 (March 20, 2020) authorized suspension for companies closed by state of emergency.  
  - Executive Decree 101 (July 13, 2020) established that total monthly working hours cannot be reduced by more than 50 percent.  
  - Law 201 enacted February 25, 2021 amended Law 157 to mandate gradual reinstatement by economic sector and to recognize payment of maternity leave benefits and provisions for people with disabilities.
- Gradual reinstatement timetable under Law 201:
  - Primary sector (mining): 3 months (until May 2021).  
  - Secondary sector (manufacturing): 6 months (until August 2021).  
  - Tertiary sector (services, including tourism) and companies with 10 employees or fewer: 8 months (until October 2021).  
- Fiscal and programmatic support:
  - Government spending estimate in 2020: about US$1.1 billion (about 2 percent of GDP) on the “Panamá Solidario” program.  
  - About ⅓ of that amount was spent in support of unemployed workers with suspended contracts through the “Vale Digital” program.  
  - “Vale Digital” would benefit almost 300,000 households or over 1 million people (about ¼ of the population of Panama).  
  - Value of the digital voucher (Vale Digital): equivalent to US$120 per month; paid to eligible individuals since March 2020.  
  - Eligibility/activation mechanism: employers register furloughs via a digital portal and obtain a digital coupon from MITRADEL; benefits are activated in the database once the employer’s contract suspension application is approved.  
  - Moratorium on servicing bank loans provided liquidity support to businesses.  
- Labor market outcomes and projections:
  - Unemployment rate: 7 percent in 2019; more than doubled to 18½ percent in September 2020 amid contract suspensions.  
  - In 2020, a total of 284,029 labor contracts were suspended due to the pandemic, or almost 15 percent of the labor force (estimated at about 2 million people).  
  - As of March 2021, 140,080 contracts have been reactivated, which is almost ½ of the originally suspended contracts.  
  - Staff estimate: unemployment rate could have declined from 18.5 percent to 15½ percent in March 2021 based on reactivations.  
  - Using estimates of Okun’s Law and projected real GDP growth for 2021, the unemployment rate may decline further to around 7 percent by end-2021.  
- Policy recommendations and priorities going forward:
  - Reduce informality—employment support programs currently available only to the formal sector.  
  - Continue initiatives to create childcare centers within government facilities to reduce the labor force participation gap and help women join the labor market.  
  - Consider aligning salary adjustments with productivity and economic conditions.  
  - Consider easing restrictions on foreign employment to foster knowledge sharing.  

### Supporting sustainable and inclusive growth: structural priorities
- Long-run objective: perpetuate high growth of past decades by fostering productivity and avoiding the “middle-income trap.”  
- Historical performance: Panama had the longest and fastest economic expansion in Latin America of the last quarter century, growing at an average annual rate of 6 percent.  
- Structural reform priorities:
  - Improve business environment and regulatory framework (judicial independence and enforcement on business contracts and property rights; strengthen insolvency framework).  
  - Improve labor market flexibility (address restrictions on hiring and firing and on employment of foreign workers).  
  - Improve education quality to close skills gaps.  
  - Enhance innovation capacity, upgrade infrastructure, and create conditions for transition to technology-intensive, high growth industries.  
  - Enhance natural disaster resilience strategy to limit disruptions to lives and livelihoods.  
- Innovation and FDI:
  - Panama underperforms peers on research institution quality and R&D expenditure; special economic zones have attracted FDI and foreign talent but local spillovers appear limited, partly due to restrictions on mobility of foreign workers.  
  - Staff supports authorities’ intention to raise investment in science, research and development.  

### Financial inclusion and governance
- Financial inclusion:
  - Panama ranks favorably regionally but underperforms compared to countries with comparable per capita income.  
  - No formal national strategy on financial inclusion noted.  
  - SBP legal tools allow banking entities to offer products for sectors not included in the financial system (e.g., simplified account opening and nonbank correspondents).  
  - Simplified due diligence rules apply to accounts with monthly transactions below US$1,500 (in compliance with FATF recommendations); these have been available since 2015.  
  - SBP is amending regulations to allow fintech firms to interact within the payment ecosystem and recommends developing a regulatory sandbox to promote fintech innovation.  
  - SBP launched a National Strategy for Financial Education in October 2019 in cooperation with the government and other financial institutions.  
- Governance:
  - 2019 Worldwide Governance Indicators point to some deterioration in government effectiveness and rule of law in recent years and a decline in the control of corruption indicator over the last decade.  
  - For Panama, the average standard error of the WGI is 0.17.

*Source: IMF staff report content (chapter and annex excerpts).*

### introduction of various support programs for the vulnerable population segments undoubtedly

### introduction of various support programs for the vulnerable population segments undoubtedly

### Impact on vulnerable populations and social outcomes
- Introduction of various support programs for the vulnerable population segments undoubtedly reduced the magnitude of the shock, but poverty rates are still expected by the World Bank to increase by at least 3½ percentage points, especially in rural areas.
- Disruptions to tourism, construction, logistics and commerce—where the employment share of women, indigenous people and other socioeconomic minorities is high—disproportionately affected these already disadvantaged population segments.
- The pandemic disrupted the provision of health and education services, which may have lasting repercussions for human capital, competitiveness, and growth.
- The pandemic contributed to higher incidence of domestic and gender violence during lockdowns.

### Macroeconomic shock, labor market, and short-term measures
- Real GDP contracted by 17.9 percent in 2020.
- Unemployment reached 18.5 percent in 2020, compared to 7.1 percent in 2019.
- The authorities’ short-term responses included:
  - Creation of Panama Solidario to assist unemployed workers and low-income families.
  - Implementation of tax moratoriums.
  - An ample loan forbearance program.
  - Ongoing support to vulnerable households and small businesses.
  - An aggressive vaccination campaign.
- Economic activity experienced setbacks in early 2021: IMAE (the monthly indicator of economic activity) fell 10.1 percent in the first quarter, compared to the first quarter of 2020.
- Employment recovery detail: about half of the 284 thousand suspended contracts were reactivated by end-March.

### Outlook and near-term projection
- Against the backdrop of resumed public infrastructure investment (headlined by the Metro Line 3 mega-project) and private sector initiatives, the authorities expect real GDP growth to reach 9 percent in 2021.

### Medium-term priorities and policy recommendations
- Reversing socioeconomic contractions will require decisive policy action in the medium term. Long-term goals identified include:
  - Enhancing the efficiency of social spending (including by centralizing the registry of beneficiaries, which is currently in its final stages).
  - Strengthening educational and technical training outcomes.
  - Prioritizing country-appropriate and fiscally-sustainable strategies to reduce inequality.
  - Improving living conditions in the comarcas (areas inhabited by indigenous populations).
  - Enhancing women’s economic opportunities and livelihoods.
- The authorities emphasize making the recovery inclusive and broad-based and welcome continuous cooperation with various development partners.
- Additional measures to support a more business-friendly and competitive environment:
  - Accelerating digitization.
  - Introducing more flexibility in employment practices.
  - Expanding financial education programs.
  - Promoting financial inclusion and fintech initiatives.

### Authorities’ assessment and cooperation with the Fund
- The authorities concur that filling the socioeconomic gaps widened by the pandemic is imperative for sustainable growth.
- Social support programs operating during the pandemic were key to sustaining the consumption needs of the vulnerable, but post-pandemic recovery necessitates long-term strategic policy action to align Panama’s social outcomes with those of countries with comparable income levels.
- The authorities reiterated appreciation for the Fund’s technical assistance and policy recommendations.

*Source: PANAMA — STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 24, 2021).*

### 4. The  progress  in  the  vaccination  rollout  should  provide  a  boost  to  the  recovery.

### 4. The  progress  in  the  vaccination  rollout  should  provide  a  boost  to  the  recovery.

### Vaccination rollout and economic outlook
- Vaccination started in late January with the arrival of the first Pfizer doses.
- Authorities have reached supply agreements for 9.3 million doses from Pfizer, AstraZeneca and COVAX for full two-dose coverage of the entire population.
- Through late May, 17.9 percent of population received at least one dose, while new cases and deaths remained subdued.
- Fulfilling the current vaccine delivery schedule is described as critical to reach herd immunity before the end of the year target, providing a definitive boost to the ongoing economic recovery.

### Fiscal policy and public financial management (PFM)
- 2020 fiscal outcomes and 2021 projection:
  - Fiscal deficit widened to 10.1 percent of GDP in 2020 from 3.6 percent of GDP in 2019.
  - Debt-to-GDP ratio reached 64 percent at year-end 2020.
  - Panama issued a new US$2.45 billion global bond in mid-January.
  - Fiscal performance is projected to improve and close 2021 with a 7.5 percent of GDP budget deficit in line with the Social and Fiscal Responsibility Law (SFRL) ceiling.
- SFRL fiscal consolidation path (authorities committed to strict implementation):
  - 7.5 percent of GDP in 2021
  - 4.0 percent in 2022
  - 2.0 percent in 2023-24
  - 1.5 percent in 2025
- Revenue and support drivers:
  - Fiscal revenue should be supported by the Cobre Panamá mine, the Panama Canal and the introduction of revenue-enhancing measures aimed at improving tax collection efficiency, broadening the tax base, and streamlining tax exemptions.
- PFM strengthening measures:
  - IMF technical assistance on budget management and procurement is instrumental.
  - Authorities are improving the multi-year budget formulation framework, enhancing expenditure controls, and increasing expenditure efficiency to improve social outcomes.
  - Technical assistance supports amendments to the Organic Budget Law and upgrading internal procedures and controls to avoid future accumulation of arrears.

### Financial sector performance and macroprudential technical assistance
- Resilience indicators:
  - Liquidity indicators stayed above 60 percent of total deposits throughout 2020 and the first quarter of 2021.
  - Capital adequacy ratio (CAR) reached 15.8 percent at end-March 2021, nearly twice the regulatory benchmark.
- Credit and provisioning:
  - Credit portfolio that benefitted from the loan moratorium decreased from its US$28.1 billion peak in August 2020 to US$19.6 billion in late April 2021.
  - Provisioning for modified loans was established at 3 percent of gross balances.
  - NPLs remained stable throughout 2020 and stood at 1.9 percent by end-March 2021.
- Policy instruments and support:
  - A US$1.0 billion fund for economic stimulus (FES), owned by the MEF and operated by the Banco Nacional de Panama (BNP), was established to provide liquidity for the banking system and support the recovery.
- Supervision and technical assistance requests:
  - The Superintendency of Bank (SBP) has progressed on draft legislation to bolster bank resolution, update its effectiveness, and increase depositors’ protection.
  - SBP officials indicated the need for further MCM TA to boost macroprudential policy framework, systemic risks monitoring, stress-tests, digital banking, and cybersecurity.
  - Authorities formally requested in April 2021 the inclusion of Panama in the financial sector assessment program (FSAP); the last FSAP was conducted in 2011.

### AML/CFT, financial integrity, and data adequacy
- AML/CFT progress and priorities:
  - Authorities presented a progress report on AML/CFT issues in early January 2021 as the initial step for FATF’s plenary assessment in late February.
  - The plenary assessment concluded that Panama had made progress relative to the Action Plan, yet further actions were still needed.
  - MEF hired top consultants to upgrade response capacity to implement FATF’s Action Plan.
  - Priority areas include building criminal investigation capability and improving cooperation on foreign tax information exchange.
  - Authorities continue to strengthen enforcement of final-beneficial owner identification and risk-based supervision and regulations of Denominated Non-Financial Businesses and Professions (DNFBP), targeting money laundering risks in the corporate sector.
- Technical assistance needs:
  - Technical assistance to address immediate outcome (IO) issues will be provided by the European Union and the World Bank.
  - Additional technical assistance is needed to tackle action plan initiatives and strengthen the AML/CFT supervision framework, investigative capacity, judicial actions, and enforcement of penalties to accelerate exit from the FATF list.
- Data transparency and SDDS subscription:
  - Authorities remain focused on subscribing to the SDDS by 2022 to enhance coverage, periodicity, and timeliness of data reporting.
  - The National Statistics Institute (INEC) is following a work program based on the 2020 ROSC’s guidelines and their 2020-2024 National Statistics Plan towards modernization and upgrade of technical capacity.
  - Strengthening actions include increased budget and human resources, training, and technological upgrades.
  - INEC has made initial progress in developing a preliminary template for international reserves following STA’s guidelines and requirements in the SDDS system.
  - Fund’s technical assistance and external consultants will continue to support these efforts.

*IMF staff report content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1panea2021004.pdf_