## 1panea2021005

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### Executive summary — context and staff recommendation
- Macroeconomic vulnerabilities have declined since the peak of the COVID-19 pandemic in 2020.
- Economy expected to rebound swiftly in 2021 as activities return to normality and the population is increasingly vaccinated.
- External imbalances are contained.
- Fiscal position is gradually consolidated under the revised fiscal rule, which will ensure a declining path for the NFPS debt.
- Outlook subject to elevated risks: more contagious COVID-19 variants, setbacks in FATF action plan implementation, delays in fiscal consolidation, and a prolonged pandemic.
- Staff recommendation: complete the first PLL review because:
  - all conditionality for the first review under the PLL has been observed;
  - Panama continues to meet the PLL qualification criteria;
  - the Executive Board gave a positive assessment of Panama’s policies in the context of the 2021 Article IV Consultation;
  - the authorities remain committed to implement the strong policies under the PLL arrangement.

### Recent developments — select highlights
- IMF support:
  - Two-year Precautionary and Liquidity Line (PLL) approved on January 19, 2021, for 500 percent of quota (SDR 1.884 billion or about US$2.7 billion).
  - Rapid Financing Instrument (RFI) approved on April 15, 2020, for 100 percent of quota (SDR 0.377 billion or about US$0.5 billion).
- Real economy:
  - Real GDP contracted by an unprecedented 17.9 percent in 2020.
  - Unemployment rate spiked to 18.5 percent in September 2020.
  - Index of economic activity (IMAE) (SA) increased at a rate of 28.1 percent (y/y) in April 2021; level of activity in April 2021 was about 5½ percent higher than in the last quarter of 2020 and over 30 percent higher than the trough in May 2020.
- Prices:
  - Consumer price inflation increased to 1.9 percent (y/y) in May 2021.
- Fiscal developments:
  - NFPS fiscal deficit swelled to 10 percent of GDP in 2020 (within amended fiscal rule target between 9 and 10½ percent of GDP for 2020).
  - NFPS debt rose from 42¼ percent of GDP in 2019 to 66⅓ percent of GDP in 2020.
  - Q1-2021 NFPS deficit amounted to 1.7 percent of GDP; government objective for 2021 is a fiscal deficit of 7½ percent of GDP.
- External sector:
  - Current account switched to a surplus of 2¼ percent of GDP in 2020 (from a deficit of 5 percent of GDP in 2019).
  - External position assessed to be moderately stronger than level implied by fundamentals and desirable policy settings.
- Banking sector:
  - Regulatory capital adequacy ratio: 16.2 percent as of end-March, 2021 (compared to 15.2 percent as of end-2019); minimum requirement of 8 percent.
  - Short-term assets covered 64 percent of short-term deposits as of end-May 2021 (regulatory minimum 30 percent).
  - Delinquency rate of domestic loans: 4.5 percent at end-March 2021 (4.4 percent at end-2019).
  - Provisioning rose to 156 percent of NPL in 2020 from 102 percent of NPL in 2019.
- FATF status:
  - Panama remains on the FATF grey list as of June 2021; progress acknowledged but not sufficient to remove Panama from the list. FATF called for urgent action; next FATF plenary scheduled for October 2021.

### Performance under the PLL arrangement
- Indicative targets: all indicative targets for this review were met with large margins.
  - Government deposits coverage: national government deposits at the National Bank of Panama (BNP) stood at US$4,228.6 million at end-March 2021, above the minimum indicative target of US$1,000 million.
  - Public banks liquidity buffers: ratio of liquid assets up to 186 days of official banks to total net deposits up to 186 days stood at 84.1 percent at end-March 2021, above the minimum indicative target of 30 percent.
- Structural benchmark:
  - The General Comptroller’s Office published in the Official Gazette, on May 27, 2021, resolution 205-2021-INEC of February 10, 2021, revamping the National Statistical Council in line with ROSC recommendations.

### Outlook and key projections
- Growth:
  - Real GDP expected to grow by 12 percent in 2021.
  - Medium-term potential annual growth rate expected to stabilize at 5 percent.
- Inflation:
  - Headline inflation expected to pick up to 2 percent (y/y) by end-2021 and remain at that rate over the medium term.
- Fiscal:
  - NFPS deficit expected to reduce to about 7½ percent of GDP (US$4½ billion) in 2021.
  - Medium-term target per the amended fiscal rule: deficit of 1½ percent of GDP by 2025.
  - Drivers: rebound in revenues estimated at about 1 percent of GDP and moderation of spending totalling about 1¾ percent of GDP; reprioritization of spending by over 2 percent of GDP towards vaccines and social programs while reducing other spending.
- External:
  - Temporary deterioration to about 3½ percent of GDP current account deficit in 2021; projected reduction to 2½ percent of GDP by 2026.

### Balance of risks (tilted to the downside)
- Epidemiological: new wave of the pandemic, more contagious mutations, vaccine effectiveness concerns.
- External: disruption to global trade and capital flows.
- Financial integrity: lack of meaningful progress on AML/CFT reforms and removal from FATF grey list; continued inclusion on EU list of non-cooperative jurisdictions for tax purposes could affect correspondent banking relationships and key overseas credit channels.
- Security and climate: cyberattacks and more frequent/severe climate-related natural disasters could affect Canal activity, agriculture, and tourism.

### External Economic Stress Index (EESI) — methodology and scenarios
- Components: (i) the U.S. growth rate; (ii) world exports; (iii) the change in the 10-year U.S. Treasury yield; (iv) the volatility index VIX.
- Weights: World GDP Growth 0.31; US GDP growth 0.18; Change in 10-year Treasury yield 0.11; VIX 0.40.
- Baseline scenario: April 2021 WEO projections for US and world GDP growth; VIX assumed around current level; 10-year US Treasury yield assumed to increase gradually.
- Adverse scenario: slower recovery of the US and global economy combined with persistent financial market volatility.
- Assessment:
  - EESI experienced a strong decline in Q2 2020 and a steep increase in Q3 2020.
  - External pressures abated somewhat since PLL approval due to stronger-than-expected global growth, reduced uncertainty around vaccine development, and stronger US prospects.
  - Under the baseline, external pressures expected to remain manageable and in line with historical averages; materialization of downside risks would lead to a moderately heightened stress index.

### PLL qualification — general assessment and criteria performance
- Staff assessment: Panama continues to qualify for a PLL arrangement.
- Performance across qualification areas:
  - Performs strongly in 3 out of 5 areas: external, fiscal, and monetary.
  - Does not substantially underperform in the other 2 areas: financial and data.
- Directors welcomed authorities’ commitment to sound macroeconomic and financial sector policies and encouraged continued reforms to reduce vulnerabilities and bolster job creation and inclusive growth.

### External position and market access (performs strongly) — selected facts
- External balance: assessed moderately stronger than level implied by fundamentals and desirable policy settings.
- Capital account: public debt averaged only 22 percent of total external debt over past 3 years; FDI accounted for 55 percent during 2018–20.
- Market access: sovereign global bond issuances in recent years amounted to 2,160 Panama’s quota, far exceeding minimum threshold of 50 percent; Panama achieved investment grade status in 2010; EMBI spread stood at 160 bps as of June 1, 2021.
- Reserve-position metrics (selected):
  - Central Government liquidity coverage (months of expenditure): 2020: 4.5; 2021 (f): 2.0.
  - Banks' statutory liquidity buffers (percent; minimum 30%): 2020: 63.5; 2021 (f): 59.4.
  - Short-term debt coverage (percent): 2020: 108.3; 2021 (f): 87.0.

### Fiscal policy (performs strongly) — debt and fiscal rule
- Fiscal rule: 2008 SFRL anchors fiscal management; 2019 anchors were NFPS deficit of 2 percent of GDP and gross debt of 40 percent of GDP; National Assembly relaxed target for 2020 to 10½ percent of GDP with plan to adjust to deficit anchor of 1½ percent of GDP in 2025.
- Public debt:
  - NFPS debt: 66⅓ percent in 2020; projected to decline to below 55⅓ percent of GDP by 2026.
  - Net debt amounted to 41¼ percent of GDP in 2020.
- Primary balance:
  - Primary surplus expected under fiscal rule for 2025: ½ percent of GDP.
  - Primary deficit required to maintain debt-to-GDP constant under DSA: about 1 percent of GDP.

### Monetary policy (performs strongly)
- Dollarization: Panama fully dollarized; no central bank; monetary policy follows U.S. Federal Reserve.
- Inflation: below 2 percent over last 5 years; inflationary expectations around 2 percent over the medium term.

### Financial sector soundness and supervision (does not substantially underperform)
- Main non-performing factor: Panama on FATF grey list.
- System soundness:
  - Regulatory capital adequacy ratio: 16.2 percent as of end-March 2021 (compared to 15.2 percent as of end-2019); regulatory minimum 8 percent.
  - Bank liquidity: 64 percent of short-term deposits as of end-May 2021; regulatory minimum 30 percent.
  - Loan moratorium and provisioning:
    - Rule 9, 2020 mandated a provision equivalent to 3 percent of the gross modified loan portfolio.
    - As of April 2021, banks had made provisions amounting to 3.8 percent of the gross modified loan portfolio, on average.
    - Delinquency rate of domestic loans: 4.5 percent at end-March 2021 (4.4 percent at end-2019).
  - Crisis management: draft legal framework for expedited bank resolution being prepared; authorities collaborating on national and regional crisis management plan.
- Supervision: authorities adhere to modern regulatory framework and strict supervisory standards; FSAP/FSSA recommendations mostly implemented.

### Data adequacy (does not substantially underperform)
- Data provision, quality, and transparency broadly adequate, but coverage, periodicity, and timeliness of some series need improvement.
- ROSC update (February 2020): well-developed macroeconomic statistical system; progress toward SDDS requirements.
- SDDS subscription requirements: improve coverage in 4 out of 19 data categories and periodicity/timeliness in 12 categories.
- Structural benchmark: revamp of National Statistical Council met (Official Gazette, May 27, 2021).

### Policies under the PLL — recovery, fiscal re-anchoring, and reforms
- Recovery policies and social objectives:
  - Intensify COVID-19 vaccination program.
  - Renew efforts to reduce poverty and inequality, broaden social inclusion, enhance productivity, and adhere to national climate change strategies.
- Re-anchoring fiscal policy:
  - Public debt path: from 66¼ percent of GDP in 2020 to 55¼ in 2026.
  - Primary fiscal balance envisaged under fiscal rule for 2025: a primary surplus of ½ percent of GDP.
  - Planned NFPS fiscal deficit target for 2022: 4 percent of GDP.
  - Potential additional revenue measures: reduce tax evasion (over 6 percent of GDP), rationalize tax expenditures (about 4 percent of GDP), possible gradual increases in VAT and fuel tax rates.
- Enhancing financial integrity:
  - Priority to exit FATF grey list; adopt remaining items on FATF action plan urgently.
  - Technical assistance received from Fund, World Bank, IDB, U.S., and European Commission.
  - Structural benchmark: adopt measures by October 2021 to strengthen AML/CFT effectiveness.
- Bolstering financial stability — recommended actions:
  - Recalibrate ad hoc provisioning requirement on modified loans during transition period between end-June and end-September 2021 to observe loan behavior post-moratorium.
  - Conduct a risk-focused loan portfolio examination of all banks to assess credit risk and capital buffers.
  - Implement Basel III capital conservation buffer and net stable funding ratio in the medium term.
  - Establish a roadmap for capital markets development to expand and diversify financing sources.
  - Request and utilize IMF technical assistance (including FSAP mission).
- Improving public financial management (PFM) — planned actions:
  - Improve capacity to forecast revenues and formulate realistic medium-term revenue framework with IMF technical support.
  - Reinforce alignment of departmental expenditure ceilings with policy priorities and aggregate expenditure targets.
  - Transition budget preparation to a multi-year framework from 2022.
  - Strengthen legal binding nature of budgetary appropriations by drafting an Organic Budget Law with IMF technical assistance.
  - Adapt accounting practices to ensure disclosure of all types of arrears and publish below-the-line data in fiscal reports.
  - Ensure ex-post audits of COVID-19 expenditure are conducted and published.
- Strengthening data adequacy:
  - Implement National Statistical Plan for 2020–24; INEC expanded outreach and established an intelligence unit; rebase GDP and update CPI weights ongoing.
  - Benchmarks: publication of international reserve template on track by end-September 2021; end-May structural benchmark on National Statistical Council met.

### Capacity to repay the Fund, safeguards, and exit strategy
- Capacity-to-repay indicators if PLL fully drawn:
  - Fund obligations would represent a maximum of 2.7 percent of Panama’s total external debt over the projection period.
  - Fund obligations would represent 34.4 percent of gross international reserves.
  - Fund obligations would represent 13.9 percent of exports.
- Safeguards assessment:
  - BNP implemented most recommendations from September 2020 safeguards assessment (external auditor selection criteria, enhanced investment practices).
  - Work continues to reinforce internal audit and finalize legal framework for FES; approval delayed for further consultation.
- Exit strategy:
  - Under baseline, primary fiscal deficit would fall below debt-stabilizing balance by end of arrangement; public debt on downward path.
  - Authorities need to define and communicate exit strategy accounting for strengthened buffers, policy space, and remaining structural reforms.

### Staff appraisal and recommendations — key priorities
- PLL qualification reaffirmed: Panama continues to meet PLL qualification criteria.
- Implementation:
  - Policies under PLL remain on track; end-March 2021 indicative targets met.
- Policy priorities:
  - Continue fiscal consolidation following revised SFRL to ensure NFPS debt declines to below 60 percent of GDP starting 2024 and continues reduction thereafter.
  - Enhance fiscal credibility via robust multiannual budget framework with safeguards against arrears and clearer sanctions for noncompliance.
  - Seek technical assistance to improve revenue forecasting and develop multi-year revenue framework.
  - Fortify financial sector through intensified regulatory supervision, macrofinancial stress tests, and ensuring adequate capital and loan-loss provisions.
  - Prioritize exit from FATF grey list and progress on FATF action plan.
  - Continue statistical improvements and subscription to SDDS by 2022.
- Broader message: accelerate policy actions to strengthen macroeconomic resilience, pursue inclusive growth, and address socioeconomic gaps widened by the pandemic.

### Real sector, fiscal, external, and banking system quantitative highlights (selected series)
- Real GDP growth (2007 prices): 2019: 3.0; 2020: -17.9; 2021 (est.): 12.0; 2022–2026 (projections): 5.0 each year.
- CPI (average): 2020: -1.6; 2021 (est.): 1.8; 2022–2026: 2.0 each year.
- Output gap: 2020: -14.1; 2021: -6.3; 2025–2026: 0.0 by 2025–2026.
- NFPS overall balance (incl. ACP): 2019: -3.2; 2020: -8.9; 2021 (est.): -6.7.
- NFPS revenue (percent of GDP): 2020: 18.5; 2021: 19.6; 2026 (proj.): 21.2.
- NFPS expenditure (percent of GDP): 2020: 30.7; 2021: 29.3; 2026 (proj.): 22.6.
- Current account (percent of GDP): 2019: -5.0; 2020: 2.3; 2021: -3.1; 2026 (proj.): -2.2.
- Gross international reserves (US$ millions): 2020: 9,936; 2021 (est.): 11,124; 2022 (proj.): 11,808.
- Total public debt (NFPS, percent of GDP): 2019: 42.2; 2020: 66.3; 2021: 62.1; 2026 (proj.): 55.3.
- Banking indicators:
  - Regulatory capital to risk weighted assets: 2019: 15.2; 2020: 15.7; end-March 2021: 16.2.
  - Nonperforming loans to gross loans: 2019: 2.0; 2020: 2.0; end-May 2021: 2.0.
  - Return on assets (ROA): 2019: 1.8; 2020: 0.7.
  - Average lending rate: 2020: 7.8; 2021: 6.2.
- Key social and macro indicators:
  - Population (millions, 2020): 4.3.
  - Poverty line (percent, 2017): 20.7.
  - GDP per capita (US$, 2020): 12,373.
  - Total unemployment rate (Sep, 2020): 18.5.

### Debt Sustainability Analysis — baseline and stress tests
- Baseline:
  - Public debt peaks in 2020 at 66¼ percent of GDP and declines to 55¼ percent of GDP in 2026.
  - Primary balance improves from a 7¾ of GDP deficit in 2020 to a ½ of GDP surplus in 2026.
  - Gross financing needs peak at 15¼ percent of GDP and shrink to 5¾ percent of GDP in 2026.
  - External financing requirements high: 76 percent in 2020.
- Stress-test outcomes:
  - Debt-to-GDP breaches 70 percent threshold only under:
    - One-standard deviation two-year growth shock → debt-to-GDP reaches 81 percent in 2023.
    - Crystallization of contingent liabilities from financial sector (government bailouts equal to 10 percent of outstanding credit) → debt-to-GDP reaches 92 percent in 2023.
  - Gross financing needs breach 15 percent of GDP benchmark only under contingent liability shock (breach by 10 percent of GDP) in year of occurrence (2022).
- Adverse scenario with PLL disbursed in 2021–22:
  - Nominal GDP growth almost 4 percent less in 2021 and 1.6 percent less in 2022 relative to baseline; interest rates on new debt issues higher by around ½ percentage point in 2021 and 1 percentage point in 2022.
  - Public deficit expands from 7.4 percent of GDP (baseline) to 8.8 percent of GDP in 2021 and from 4 percent of GDP (baseline) to 4.6 percent of GDP in 2022.
  - Increased gross financing needs met by drawing down the PLL (US$1.3 billion per year) and additional asset withdrawals of US$0.5 billion each year.
  - Projected public debt under the adverse scenario declines to 58 percent of GDP in 2026.

### Banking system resilience and policy response
- Temporary moratorium on servicing bank loans ended on June 30, 2021; moratorium originally through end-2020 with extension to mid-2021 for loan modifications.
- Fund for Economic Stimulus (FES) established August 2020 as a precautionary lender-of-last-resort-like facility; as of mid-June 2021, no commercial banks had used FES liquidity facility.
- Capital adequacy:
  - 15.7 percent as of end-2020; 16.2 percent as of end-March 2021 (regulatory minimum 8 percent).
- Liquidity:
  - Short-term assets covered 64 percent of short-term deposits as of end-May 2021 (regulatory minimum 30 percent).
- Asset quality and provisioning:
  - Share of modified loans declined from almost ½ at mid-2020 to about ⅓ in April 2021.
  - Rule 9, 2020 required provisioning equivalent to 3 percent of gross modified loan portfolio; banks made provisions amounting to 3.8 percent as of April 2021.
  - NPLs remained at 2.0 percent through end-May 2021.
- Macroprudential stance and supervisory actions:
  - Continue risk-based supervision, prosecute illegal money remitters, and strengthen FIU investigative capability.
- Program context:
  - PLL is precautionary; IMF technical assistance supports bank resolution, crisis management preparedness, systemic and cyber security risk supervision, and macroprudential regulation.

*Source: IMF staff report — "Staff’s assessment is that Panama continues to qualify for a PLL arrangement."*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Macroeconomic vulnerabilities have declined since the peak of the COVID-19 pandemic in 2020.
- The economy is expected to rebound swiftly in 2021 as activities return to normality and the population is increasingly vaccinated.
- External imbalances are contained.
- The fiscal position is gradually consolidated as the authorities remain committed to the revised fiscal rule, which will ensure a declining path for the NFPS debt.
- The outlook remains subject to elevated risks, including uncertainties arising from possible more contagious variants of the COVID-19 virus.
- Domestic risks include setbacks in implementing the FATF action plan to exit the grey list, delays in fiscal consolidation, and a prolonged pandemic that could exacerbate socioeconomic hardship and derail economic policies and the recovery.

### PLL review (staff recommendation)
- Staff recommends completion of the first PLL review because:
  - all conditionality for the first review under the PLL has been observed;
  - Panama continues to meet the PLL qualification criteria;
  - the Executive Board gave a positive assessment of Panama’s policies in the context of the 2021 Article IV Consultation; and
  - the authorities remain committed to implement the strong policies under the PLL arrangement.

- Conditionality met:
  - The end-March 2021 quantitative indicative targets (IT) on banking buffers and government deposits were met.
  - The end-May 2021 structural benchmark on the creation of the National Statistical Council was observed.

- Eligibility assessment:
  - Staff assesses that Panama continues to meet the PLL qualification criteria, performing strongly in 3 out of the 5 PLL qualification areas (external, fiscal, and monetary) and not substantially underperforming in the other 2 areas (financial and data).

- Policies:
  - Panama’s economic fundamentals and policy frameworks are sound.
  - The country is implementing (and has a track record of implementing) sound policies and remains committed to maintaining such policies in the future.

### Recent developments (select highlights)
- IMF support:
  - Two-year Precautionary and Liquidity Line (PLL) approved on January 19, 2021, for 500 percent of quota (SDR 1.884 billion or about US$2.7 billion).
  - Rapid Financing Instrument (RFI) approved on April 15, 2020, for 100 percent of quota (SDR 0.377 billion or about US$0.5 billion).

- Real economy:
  - Real GDP contracted by an unprecedented 17.9 percent in 2020.
  - Unemployment rate spiked to 18.5 percent in September 2020.
  - Index of economic activity (IMAE) (SA) increased at a rate of 28.1 percent (y/y) in April 2021; level of activity in April 2021 was about 5½ percent higher than in the last quarter of 2020 and over 30 percent higher than the trough in May 2020.

- Prices:
  - Consumer price inflation increased to 1.9 percent (y/y) in May 2021, driven by higher oil, transportation, and food prices.

- Fiscal developments:
  - NFPS fiscal deficit swelled to 10 percent of GDP in 2020, in line with the amended fiscal rule target between 9 and 10½ percent of GDP for 2020.
  - NFPS debt rose from 42¼ percent of GDP in 2019 to 66⅓ percent of GDP in 2020.
  - Q1-2021 NFPS deficit amounted to 1.7 percent of GDP, broadly in line with the government’s objective of achieving a fiscal deficit of 7½ percent of GDP in 2021.

- External sector:
  - Current account switched to a surplus of 2¼ percent of GDP in 2020 (from a deficit of 5 percent of GDP in 2019).
  - The external position is assessed in the recent Article IV to be moderately stronger than the level implied by fundamentals and desirable policy settings.

- Banking sector:
  - Regulatory capital adequacy ratio: 16.2 percent as of end-March, 2021 (compared to 15.2 percent as of end-2019); minimum requirement of 8 percent.
  - Short-term assets covered 64 percent of short-term deposits as of end-May 2021 (regulatory minimum 30 percent).
  - Delinquency rate of domestic loans: 4.5 percent at end-March 2021 (4.4 percent at end-2019).
  - Provisioning rose to 156 percent of NPL in 2020 from 102 percent of NPL in 2019.

- FATF status:
  - Panama remains on the FATF grey list as of June 2021; progress acknowledged but not sufficient to remove Panama from the list. The FATF called for urgent action; the next FATF plenary scheduled for October 2021.

### Performance under the PLL arrangement
- Indicative targets: All indicative targets for this review were met with large margins.
  - Government deposits coverage: national government deposits at the National Bank of Panama (BNP) stood at US$4,228.6 million at end-March 2021, above the minimum indicative target of US$1,000 million.
  - Public banks liquidity buffers: ratio of liquid assets up to 186 days of official banks to total net deposits up to 186 days stood at 84.1 percent at end-March 2021, above the minimum indicative target of 30 percent.

- Structural benchmark:
  - The General Comptroller’s Office published in the Official Gazette, on May 27, 2021, resolution 205-2021-INEC of February 10, 2021, revamping the National Statistical Council in line with ROSC recommendations.

### Outlook and risks
- Outlook projections:
  - Growth: real GDP is expected to grow by 12 percent in 2021; growth is expected to stabilize over the medium term at its potential annual rate of 5 percent.
  - Inflation: headline inflation is expected to pick up to 2 percent (y/y) by end-2021 and remain at that rate over the medium term.
  - Fiscal: NFPS deficit is expected to reduce to about 7½ percent of GDP (US$4½ billion) in 2021; medium-term target per the amended fiscal rule is a deficit of 1½ percent of GDP by 2025.
    - Drivers: rebound in revenues estimated at about 1 percent of GDP and moderation of spending totalling about 1¾ percent of GDP; reprioritization of spending by over 2 percent of GDP towards vaccines and social programs while reducing other spending.
  - External: temporary deterioration to about 3½ percent of GDP current account deficit in 2021; projected reduction to 2½ percent of GDP by 2026.

- Balance of risks (tilted to the downside):
  - New wave of the pandemic, including more contagious mutations and vaccine effectiveness concerns.
  - Escalation of external risks: disruption to global trade and capital flows.
  - Financial integrity risks: lack of meaningful progress on AML/CFT reforms and removal from FATF grey list; continued inclusion on EU list of non-cooperative jurisdictions for tax purposes could affect correspondent banking relationships and key overseas credit channels.
  - Security and climate risks: cyberattacks and more frequent/severe climate-related natural disasters could affect Canal activity, agriculture, and tourism.

### External Economic Stress Index (Box 1)
- Methodology:
  - The EESI is an indicator of external risks facing Panama and consists of four variables: (i) the U.S. growth rate; (ii) world exports; (iii) the change in the 10-year U.S. Treasury yield; and (iv) the volatility index VIX.
  - The index is calculated as a weighted sum of standardized deviations of the above variables from their means.
  - Weights: World GDP Growth 0.31; US GDP growth 0.18; Change in 10-year Treasury yield 0.11; VIX 0.40.

- Scenarios:
  - Baseline: April 2021 WEO projections for US and world GDP growth; VIX assumed around current level; 10-year US Treasury yield assumed to increase gradually.
  - Adverse: slower recovery of the US and global economy combined with persistent financial market volatility.

- Assessment:
  - The EESI experienced a strong decline in Q2 2020 and a steep increase in Q3 2020.
  - External pressures have abated somewhat since the PLL approval due to stronger-than-expected global growth, reduced uncertainty around vaccine development, and stronger US prospects.
  - Under the baseline, external pressures faced by Panama are expected to remain manageable and in line with historical averages; materialization of downside risks would lead to a moderately heightened stress index.

*Approved By Nigel A. Chalk (WHD) and Martin Čihák (SPR); Discussions were held virtually during April 12–23, 2021, and June 7–30, 2021.*

### 11.      Staff’s assessment is that Panama continues to qualify for a PLL arrangement. Since the

### 11.      Staff’s assessment is that Panama continues to qualify for a PLL arrangement.

### A. General Assessment
- Staff’s assessment: Panama continues to qualify for a PLL arrangement.  
- Since the approval of the PLL in January 2021, economic indicators have improved and fundamentals remain strong.  
- Executive Board’s 2021 Article IV consultation discussion: generally positive assessment of Panama’s policies; staff concludes Panama continues to meet PLL qualification criteria.

- Macroeconomic outcomes:
  - Prior to the pandemic, average annual growth of 6 percent in the last 25 years.
  - Pandemic shock in 2020 from COVID-19 caused an unprecedented downturn.
  - Growth is expected to rebound to 12 percent in 2021 as domestic economy regains normality and copper mining returns to full-scale production.
  - Medium-term potential annual growth rate expected to stabilize at 5 percent, underpinned by private investment, copper exports, Canal traffic flow and revenues, and tourism.

- Policy performance:
  - Directors welcomed authorities’ commitment to sound macroeconomic and financial sector policies and encouraged continued reforms to reduce vulnerabilities and bolster job creation and inclusive growth.

- Sound policies (fiscal and financial):
  - NFPS deficit aiming for reduction to about 7½ percent of GDP (US$4½ billion) in 2021 in line with the SFRL.
  - Further deficit reductions to 2025 expected from cyclical revenue recovery, withdrawal of COVID-related spending, tax administration improvements, and moderation of expenditure growth.
  - Large tax expenditures estimated at close to 4 percent of GDP provide margin for maneuver.
  - Temporary moratorium on servicing bank loans ended on June 30, 2021; no further extension granted.
  - FATF action plan: some progress made, but most recent FATF plenary in June called on Panama to take urgent action to fully address its action plan.

### B. Assessment of Specific Criteria — Overview
- Overall PLL eligibility assessment remains the same as January 2021.
- Staff assesses Panama to perform strongly in 3 out of 5 qualification areas: external, fiscal, and monetary.
- Panama does not substantially underperform in the other 2 areas: financial and data.
- Executive Board in 2021 Article IV supported the generally positive assessment.

### I. External Position and Market Access (performs strongly)
- Criterion 1. Sustainable external position:
  - External balance assessment during the 2021 Article IV aligned with the Precautionary And Liquidity Line Operational Guidance Note (2018).
  - External position assessed to be moderately stronger than level implied by fundamentals and desirable policy settings.
  - After a deterioration in 2021 due to a pick-up in imports, current account expected to improve steadily over the medium term, supported by Canal traffic rebound, tourism, re-exports from the free zone, and higher exports from the new copper mine.

- Criterion 2. Capital account position dominated by private flows:
  - Public debt averaged only 22 percent of total external debt over the past 3 years.
  - FDI accounted for 55 percent of the total during 2018–20.
  - Deposits and other external liabilities in the banking sector account for about 50 percent of total external liabilities.
  - NIIP projected to improve over the medium term due to higher net exports, Canal receipts, tourism, and copper exports.

- Criterion 3. Track record of steady sovereign access to capital markets at favorable terms:
  - Sovereign global bond issuances in the last years amounted to 2,160 Panama’s quota, far exceeding minimum threshold of 50 percent for the market access criterion.
  - Panama has placed bonds every year in the last decade, exceeding minimum of placing sovereign bonds in 3 out of the last 5 years.
  - Achieved investment grade status in 2010.
  - EMBI spread stood at 160 bps as of June 1, 2021 (compared to emerging markets average 305 bps and region 366 bps).

- Criterion 4. A comfortable reserve position:
  - Panama is fully dollarized and does not have its own currency or central bank.
  - Reserve position qualification assessed using traditional metrics (liquidity buffers covering government and banking sector obligations).
  - Fiscal liquidity reserve buffer:
    - Central government deposits at commercial banks are above the recommended benchmark of 1 month of expenditure.
    - Average coverage over the last decade (2010–20) is 2.4 months of central government expenditure.
    - Panama has a Sovereign Wealth Fund of about 2.6 percent of GDP (in foreign assets abroad).
  - Banking sector liquidity reserve buffer:
    - Liquid assets in banking sector are high; statutory liquidity requirement introduced in 2009.
    - As of end-May 2021, legal liquidity index ratio stood at 64 percent, more than double minimum statutory requirement of 30 percent.
    - Short-term assets cover close to 100 percent of banks’ short-term external liabilities; coverage expected to increase over the medium term.

- Reserves Adequacy Metrics (selected figures from table):
  - Central Government liquidity coverage (months of expenditure): 2016: 2.4; 2017: 1.3; 2018: 1.3; 2019: 2.8; 2020: 4.5; 2021 (f): 2.0; 2022 (f): 1.6; 2023 (f): 1.5; 2024 (f): 1.5; 2025 (f): 1.5; 2026 (f): 1.4.
  - Banks' statutory liquidity buffers (percent; minimum 30%): 2016: 62.8; 2017: 60.0; 2018: 59.4; 2019: 57.0; 2020: 63.5; 2021 (f): 59.4; 2022 (f): 58.7; 2023 (f): 58.0; 2024 (f): 57.3; 2025 (f): 56.7; 2026 (f): 56.1.
  - Short-term debt coverage (percent): 2016: 70.1; 2017: 75.4; 2018: 73.4; 2019: 79.2; 2020: 108.3; 2021 (f): 87.0; 2022 (f): 93.2; 2023 (f): 99.4; 2024 (f): 106.4; 2025 (f): 113.2; 2026 (f): 120.3.

### II. Fiscal Policy (performs strongly)
- Criterion 5. Sound public finances, including a sustainable public debt position:
  - Fiscal rule:
    - 2008 SFRL anchors fiscal management; by 2019 based on medium-term anchors for NFPS deficit of 2 percent of GDP and gross debt of 40 percent of GDP, plus an expenditure rule limiting real current spending growth to potential GDP growth.
    - COVID-19: National Assembly relaxed fiscal target for 2020 to 10½ percent of GDP with plan to gradually adjust and adhere to new fiscal deficit anchor of 1½ percent of GDP in 2025.
  - Debt sustainability:
    - NFPS debt reached 66⅓ percent in 2020.
    - Prior to pandemic, debt declined from about 60 to 42 percent of GDP over two decades.
    - NFPS financial assets in bank deposits: 12½ percent of GDP by 2020.
    - Sovereign Wealth Fund (FAP) holdings: 2¾ percent of GDP.
    - Net debt amounted to 41¼ percent of GDP in 2020.
    - Public debt projected to decline to below 55⅓ percent of GDP by 2026.
    - Primary surplus expected under fiscal rule for 2025: ½ percent of GDP.
    - Primary deficit required to maintain debt-to-GDP constant under DSA: about 1 percent of GDP.

### III. Monetary Policy (performs strongly)
- Criterion 6. Low and stable inflation; sound monetary and exchange rate framework:
  - Panama is fully dollarized and has no central bank; monetary policy follows U.S. Federal Reserve.
  - Inflation has remained below 2 percent over the last 5 years.
  - Dollarization regime in place for over a century; no expectation of regime change.
  - Inflationary expectations well-anchored and remain around 2 percent over the medium term.

### IV. Financial Sector Soundness and Supervision (does not substantially underperform)
- Main reason for not performing strongly: Panama on the FATF grey list.

- Criterion 7. Sound financial system and absence of solvency problems:
  - Well-capitalized banking system:
    - Regulatory capital adequacy ratio: 16.2 percent as of end-March 2021 (compared to 15.2 percent as of end-2019); regulatory minimum 8 percent.
    - Bank liquidity: 64 percent of short-term deposits as of end-May 2021; regulatory minimum 30 percent.
  - Fund for Economic Stimulus (FES) established August 2020 as a precautionary lender of last resort-like facility:
    - As of end-June 2021, no banks had used the FES liquidity facility; five banks had submitted applications to use credit facility funds.
  - Resilience to COVID-19 shock:
    - Loan servicing moratorium to mid-2021; share of modified local loans to total local loans declined from almost ½ at mid-2020 to about ⅓ in April 2021.
    - Rule 9, 2020 mandated banks to create a provision equivalent to 3 percent of the gross modified loan portfolio.
    - As of April 2021, banks had made provisions amounting to 3.8 percent of the gross modified loan portfolio, on average.
    - Delinquency rate of domestic loans: 4.5 percent at end-March 2021, compared to 4.4 percent at end-2019.
    - True extent of delinquency will only be known after moratorium ends.
  - Financial integrity risks:
    - Panama on FATF grey list since June 2019; actions being taken to fortify AML/CFT framework.
    - To date, no apparent adverse effects on the financial system.

- Criterion 8. Effective financial sector supervision:
  - Authorities adhere to a modern regulatory framework and strict supervisory standards; regarded among the best in Latin America.
  - FSAP/FSSA implementation:
    - Most main recommendations from 2011 FSSA implemented: RTGS introduced and being enhanced for interoperability; stress tests implemented; Financial Stability Report published annually; residential housing price index established.
  - Supervision during pandemic:
    - SBP conducted 33 inspections related to COVID risks in 2020.
    - Rule 9, 2020 increased loan-loss provisioning; total loan-loss provision to 148 percent of NPL in 2020 (from 102 percent in 2019).
  - Crisis management:
    - Draft legal framework to expedite bank resolution is being prepared following IMF recommendations.
    - Authorities collaborating with CGRC/CCSBSO members to develop national and regional crisis management plan.

### V. Data Adequacy (does not substantially underperform)
- Criterion 9. Data transparency and integrity:
  - Data provision, quality, and transparency broadly adequate but coverage, periodicity, and timeliness of some series need improvement.
  - Metadata regularly updated on DSBB.
  - ROSC update conducted February 2020 concluded Panama has a well-developed macroeconomic statistical system and for the most part observes international best practices; progress toward meeting SDDS requirements.
  - To subscribe to SDDS, Panama must improve coverage in 4 out of 19 data categories (central and general government operations, interest rates, and reserves) and periodicity and timeliness in 12 data categories across sectors.
  - Authorities transparent about plans for improvement; some improvements to be addressed in the context of the PLL.

### Policies under the PLL
- (Text ends at heading "POLICIES UNDER THE PLL" in the source.)

*Source: IMF staff report — "Staff’s assessment is that Panama continues to qualify for a PLL arrangement."*

### 14.      The authorities remain committed to strong policies to support the recovery. The

### 14.      The authorities remain committed to strong policies to support the recovery.

### Recovery policies and social objectives
- Authorities continue to intensify the COVID-19 vaccination program to increase the vaccination rate and reach all segments of the population.
- Efforts to reduce poverty and inequality, broaden social inclusion, enhance productivity and adhere to national climate change strategies are being reignited as economic recovery gathers momentum.

### Re-anchoring fiscal policy
- Medium-term public debt path under gradual fiscal consolidation following the revised SFRL:
  - Public debt: from 66¼ percent of GDP in 2020 to 55¼ in 2026.
- Fiscal rule and primary balance comparisons:
  - Primary fiscal balance envisaged under the fiscal rule for 2025: a primary surplus of ½ percent of GDP.
  - Primary balance that would stabilize the current debt to GDP ratio: a primary deficit of about 1 percent of GDP.
- Planned fiscal consolidation beyond 2021:
  - NFPS fiscal deficit target for 2022: 4 percent of GDP.
  - Consolidation supported by improvements in tax administration, ongoing modernization of the General Direction of Revenues and Customs, and moderating primary expenditure growth.
- Potential additional revenue mobilization measures mentioned:
  - Improvements in reducing tax evasion (over 6 percent of GDP).
  - Rationalization of tax expenditures (about 4 percent of GDP).
  - Room for gradual increases in some taxes like the VAT and fuel tax rates.

### Enhancing financial integrity
- Exiting the FATF’s watchlist (grey list) is a key priority to preserve Panama’s position as a regional financial center.
- Authorities are urged to urgently address all remaining items on the FATF action plan to exit the grey list.
- Technical assistance received on AML/CFT from: the Fund, World Bank, the IDB, the U.S., and the European Commission.
- Structural benchmark: authorities committed to adopt measures by October 2021 to strengthen the effectiveness of their AML/CFT framework.

### Bolstering financial stability
- Tight supervision and monitoring are needed to safeguard stability.
- Policy actions and assessments advised:
  - Recalibrate the ad hoc provisioning requirement on modified loans in line with evolving circumstances during the transition period between end-June and end-September 2021 to observe loan behavior after the end of the moratorium on servicing bank loans on June 30, 2021.
  - Conduct a risk-focused loan portfolio examination of all banks, including an assessment of fundamental asset quality, to assess credit risk and capital buffers.
  - Implement the Basel III capital conservation buffer and net stable funding ratio in the medium term to enhance banks’ capital and liquidity buffers.
  - Establish a roadmap for capital markets development to expand and diversify financing sources.
- Authorities have requested technical assistance to enhance regulatory and supervisory frameworks and requested a mission under the Financial Sector Assessment Program (FSAP).

### Improving public financial management (PFM)
- Authorities have adhered to an Action Plan aimed at enhancing budget preparation, execution and fiscal transparency to prevent resurfacing of arrears.
- Planned PFM improvements:
  - MEF to improve capacity to forecast revenues and formulate a realistic medium-term revenue framework with Fund technical support.
  - Reinforce alignment of departmental expenditure ceilings with policy priorities and aggregate expenditure targets.
  - Transition budget preparation to a multi-year framework from 2022 by setting indicative ceilings beyond the budget year and facilitating transfers of unspent appropriations between fiscal years to improve investment planning and timely payments.
  - Strengthen the legal binding nature of budgetary appropriations by drafting an Organic Budget Law with IMF technical assistance and adapt the information management system to better track execution of contracts.
  - Adapt accounting practices to ensure disclosure of all types of arrears in annual financial statements and publish below-the-line data in fiscal reports to reflect commercial debt transactions and disclose outstanding stocks.
- Fiscal transparency advances:
  - Disclosure of public procurement information enhanced by Law 153/2020.
  - Companies with contracts above US$500,000 are required to disclose the name of their beneficial owners to the government; however, publication of beneficial owners is limited by Supreme Court rulings in some cases.
  - Authorities should ensure that ex-post audits of COVID-19 expenditure are conducted and published.

### Strengthening data adequacy
- Authorities have begun implementing recommendations of the 2020 ROSC mission by revamping the National Statistical Council (NSC).
- Actions to support statistical improvement:
  - Implement the National Statistical Plan for 2020–24 and strengthen coordination among data users and providers.
  - INEC expanded outreach through innovative technologies and established an intelligence unit.
  - Efforts to rebase GDP and update CPI weights continue.
- Targets and progress:
  - With increased efforts and resources, Panama could meet SDDS requirements ahead of the original target of 2022.
  - Benchmark on publication of the international reserve template is on track to be achieved by end-September 2021.
  - End-May structural benchmark on the National Statistical Council was met.

### Capacity to repay the Fund, safeguards, and exit strategy
- Capacity to repay the Fund if Panama draws on the entire amount available under the PLL:
  - Fund obligations would represent a maximum of 2.7 percent of Panama’s total external debt over the projection period.
  - Fund obligations would represent 34.4 percent of gross international reserves.
  - Fund obligations would represent 13.9 percent of exports.
- Impact on Fund exposure and commitments:
  - Credit and liquidity risks to the Fund would remain low.
  - The PLL arrangement’s impact on the Fund’s liquidity and potential exposure is moderate; the commitment to Panama is moderate and reduces the Fund’s forward commitment capacity only marginally.
- Safeguards assessment:
  - BNP has implemented most recommendations from the September 2020 safeguards assessment, 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 implementing the FES; approval is delayed for further consultation.
- Exit strategy considerations:
  - Under the baseline scenario, by the end of the arrangement the primary fiscal deficit would fall below the debt-stabilizing balance, greatly reducing public sector financing needs, and public debt would be on a downward path.
  - The current account deficit would be close to expected levels for an emerging market country like Panama.
  - Authorities need to define and communicate their exit strategy accounting for strengthened buffers, policy space, and remaining structural reforms to improve competitiveness, reduce poverty and inequality, and address climate risks.

### Staff appraisal and recommendations
- PLL qualification and policy assessment:
  - Panama continues to meet the PLL qualification criteria.
  - Panama performs strongly in three out of five PLL qualification areas (external, fiscal and monetary) and does not substantially underperform in the other two areas (financial and data).
- Implementation status:
  - Implementation of policies under the PLL arrangement remains on track.
  - End-March 2021 indicative targets were met.
- Policy priorities going forward:
  - Continue fiscal consolidation following the revised SFRL to ensure a decline in the NFPS debt burden to below 60 percent of GDP starting 2024 and continuing reduction thereafter.
  - Enhance fiscal credibility by linking budget allocations with the medium-term fiscal framework through a robust multiannual budget framework with safeguards against arrears accumulation, including clearer sanctions for not respecting the budget law.
  - Seek further technical assistance to improve capacity to forecast revenues and develop a multi-year revenue framework.
  - Fortify the financial sector through intensified regulatory supervision and monitoring of banks, internal macrofinancial stress tests, and ensuring capital adequacy and loan-loss provisions are adequate, supported by IMF technical assistance.
  - Continue prioritizing exit from the FATF grey list and progress on the FATF action plan.
  - Continue statistical improvements and subscription to the SDDS by 2022.
- Broader policy message:
  - Accelerated policy actions are needed to strengthen macroeconomic resilience and reach higher and more inclusive growth.
  - Filling socioeconomic gaps widened by the pandemic is imperative; post-pandemic recovery requires long-term strategic policy action to align Panama’s social outcomes with those of countries with comparable income levels.
  - Continuous cooperation with international agencies and other countries will help foster an inclusive and broad-based recovery.

*IMF staff report chapter excerpt.*

### 27.      Against this background, staff recommends the completion of the first review under

### 1panea2021005 - 27.      Against this background, staff recommends the completion of the first review under

### Real sector developments
- Economic contraction was sharp and especially drastic in Q2-2020; Real GDP growth (2007 prices):
  - 2019: 3.0
  - 2020: -17.9
  - 2021 (est.): 12.0
  - 2022–2026 (projections): 5.0 each year
- Demand contributions and composition (selected):
  - Private consumption 2020: -15.7 (2021: 12.2)
  - Public consumption 2020: 19.1 (2021: 4.9)
  - Private investment 2020: -40.0 (2021: 32.4)
  - Public investment (percent change) 2019–2021: -1.6 (2019), -19.7 (2020), 9.1 (2021)
- Prices and labor:
  - Consumer price index (average): 2020: -1.6; 2021 (est.): 1.8; 2022–2026: 2.0 each year
  - Output gap: 2020: -14.1; 2021: -6.3; gradually closes to 0.0 by 2025–2026
  - Total unemployment rate (Sep, 2020): 18.5
- Sectoral notes:
  - All sectors except mining experienced a contraction in 2020, with construction contributing the most.
  - Employment growth collapsed in 2020, services sector worst affected.
  - High-frequency indicators (index 2014Q1=100): sharp declines in CFZ trade volume, toll revenue, new car registrations, and value of construction in Q2-2020.

### Fiscal developments
- Fiscal balances (Non-Financial Public Sector):
  - NFPS overall balance (incl. ACP): 2019: -3.2; 2020: -8.9; 2021 (est.): -6.7; 2022–2026: from -3.3 to -0.8
  - Central government overall balance: 2019: -4.8; 2020: -9.9; 2021: -6.8; 2022: -4.1; improving to -1.4 by 2026
- Revenue and expenditure (percent of GDP):
  - Revenue (NFPS): 2020: 18.5; 2021: 19.6; projected 2026: 21.2
  - Expenditure (NFPS): 2020: 30.7; 2021: 29.3; projected 2026: 22.6
  - Central government revenues and grants: 2020: 12.5; 2021: 13.3; 2026: 14.7
  - Central government total expenditure: 2020: 22.4; 2021: 20.0; 2026: 16.2
- COVID-19 related expenditure (NFPS and Central Government):
  - NFPS o/w COVID-19 related expenditure: 2020: 3.0; 2021: 2.2; 2022 onward: 0.0
  - Central government o/w COVID-19 related expenditure: 2020: 3.0; 2021: 2.2; 2022 onward: 0.0
- Revenue composition (central government):
  - Tax revenue (percent of GDP): 2020: 7.5; 2021: 8.2; 2026: 9.8
  - Nontax revenue (percent of GDP): 2020: 5.0; 2021: 4.7; 2026: 5.0
  - Panama Canal fees and dividends (central government, percent of GDP): 2020: 2.4; 2021: 2.5; 2026: 2.8
- Public investment and prioritization:
  - Public Gross Fixed Capital Formation (NFPS, percent of GDP) 2020: 5.3; 2021: 5.2; gradual moderation in 2021 to accommodate COVID-related spending.

### External sector developments
- Current account (percent of GDP):
  - 2019: -5.0; 2020: 2.3; 2021: -3.1; 2022–2026: improving from -2.9 to -2.2
- Merchandise and services:
  - Merchandise trade excluding Colón Free Zone, net (percent of GDP): 2020: -8.3; 2021: -10.5
  - Exports f.o.b. (percent of GDP): 2020: 8.7; 2021: 11.6
  - Imports f.o.b. (percent of GDP): 2020: 17.0; 2021: 22.1
  - Re-exports (Colón Free Zone) f.o.b. 2020: 13.3 (percent of GDP)
  - Services balance: travel net 2020: 1.2; transportation (of which Canal) 2020: 8.0 (Canal 6.5)
- External debt and reserves:
  - External debt (percent of GDP): 2019: 156.8 (Table 1 shows 156.8 as "External Debt" value); Non-Financial Public Sector external debt 2020: 55.1 (percent of GDP)
  - Gross external debt (NFPS) rose in 2020 amid public issuance and GDP denominator effect.
  - Gross international reserves (millions of U.S. dollars): 2020: 9,936; 2021 (est.): 11,124; 2022 (proj.): 11,808
  - Reserves in months of imports of goods and services: 2020: 5.0 months; 2021: 5.1 months; 2022: 5.0 months
- Exchange rates:
  - Panama NEER and REER: REER depreciated in 2020 relative to 2019 amid low inflation in Panama relative to peers.

### Banking sector soundness
- Asset quality and provisioning:
  - Nonperforming loans to total gross loans: 2019: 2.0; 2020: 2.0
  - NPLs rose following economic weakness; provisioning increased with adoption of stricter provisioning requirements.
- Profitability and margins:
  - Return on assets (ROA): 2019: 1.8; 2020: 0.7
  - Net interest margin: 2019 and 2020 show slight decline; average lending rate 2020: 7.8 (Table 1 shows 2020 average lending rate 7.8; 2021: 6.2)
- Capital and liquidity:
  - Capital Adequacy Ratio (regulatory capital to risk-weighted assets): 2019: 15.2; 2020: 15.7
  - Banks’ capital adequacy remains above regulatory minimum.
  - Liquid assets to total assets: 2019: 12.8; 2020: 17.6
  - Liquidity increased and remained ample.
- Financial soundness indicators (selected, end-of-period):
  - Regulatory capital to risk weighted assets: 2015: 14.9; 2020: 15.7
  - Return on equity: 2019: 15.3; 2020: 6.5
  - Customer deposits to total non-interbank loans: 2020: 84.1

### Key economic and social indicators (Table 1 highlights)
- 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
- Life expectancy at birth (years, 2018): 78.3
- GDP per capita (US$, 2020): 12,373
- Total unemployment rate (Sep, 2020): 18.5
- IMF Quota (SDR, million): 376.8
- Nominal GDP (in millions of US$):
  - 2019: 66,788
  - 2020: 52,938
  - 2021 (est.): 60,332
  - 2026 (proj.): 84,978

### Public finances and public debt
- Non-Financial Public Sector total public debt (percent of GDP):
  - 2019: 42.2; 2020: 66.3; 2021: 62.1; projected 2026: 55.3
- Central government gross debt (percent of GDP):
  - 2019: 47.6; 2020: 73.1; 2021: 68.0; projected 2026: 59.5
- Financial assets and net debt (selected):
  - Central government financial assets (percent of GDP): 2020: 12.5; 2021: 8.1
  - Central government net debt: 2020: 60.6 (percent of GDP)
  - NFPS net debt: 2020: 43.4 (percent of GDP)
- Memorandum item:
  - Net Debt as defined under SFRL: 2020: 70.5; 2021: 65.8; projected 2026: 56.2

### Banking system accounts (Table 5 highlights)
- Private sector credit (in millions of U.S. dollars):
  - 2019: 54,901; 2020: 53,465; 2021 (est.): 60,933; 2026 (proj.): 85,824
- Total deposits (in millions of U.S. dollars):
  - 2019: 42,239; 2020: 45,703; 2021 (est.): 53,420; 2026 (proj.): 79,149
- Deposit as % of private sector credit:
  - 2019: 76.9; 2020: 85.5; 2021: 87.7; 2026: 92.2
- M2 (12-month percent change): 2020: 9.5; 2021: 16.9; 2022 (proj.): 8.0

### Balance of payments and external vulnerability
- Current account (percent of GDP): 2020: 2.3; 2021: -3.1; 2022: -2.9
- Financial account (percent of GDP): 2020: 1.8; 2021: -3.1; 2022: -2.9
- Foreign direct investment, net (percent of GDP): 2020: -1.2; 2021: -4.0; 2022: -6.3
- External vulnerability indicators (selected):
  - Gross international reserves (millions of U.S. dollars): 2020: 9,936; 2021: 11,124; 2022: 11,808
  - Reserves in months of imports of goods and services: 2020: 5.0; 2021: 5.1; 2022: 5.0
  - Non-Financial Public Sector external debt (percent of GDP): 2020: 55.1; 2021: 53.5; 2022: 53.3
  - External interest payments (percent of exports of goods and services): 2020: 8.1; 2021: 10.1; 2022: 8.7

### Capacity to repay indicators and PLL schedule
- GRA credit and exposures (SDR millions, Table 9):
  - GRA credit to Panama: 2020: 376.8; 2021: 1,318.8; 2022: 2,260.8; 2023: 2,166.6; 2024: 1,860.5; 2025: 942.0; 2026: 117.8
  - Charges due on GRA credit: 2020: 4.0; 2021: 13.2; 2022: 53.4; 2023: 54.6; 2024: 53.8; 2025: 39.9; 2026: 7.3
  - Repurchases under the PLL: 2024: 117.8; 2025: 824.3; 2026: 824.3
- Ratios (selected):
  - Total external debt (percent of GDP): 2020: 201.9; 2021: 192.4; 2022: 196.1
  - Public external debt (percent of GDP): 2020: 56.9; 2021: 59.1; 2022: 60.5
  - Public external debt service (percent of exports of goods and services): 2020: 14.0; 2021: 12.1; 2022: 8.1
- Proposed Schedule of Reviews and Available Credit under the PLL Arrangement, 2021–22 (Table 10):
  - January 19, 2021 — Approval of the PLL arrangement: 942 Millions of SDRs (cumulative), 250 Percent of Quota (cumulative)
  - July 18, 2021 — Completion of First Review: 942 Millions of SDRs, 250 Percent of Quota
  - January 18, 2022 — Completion of Second Review: 1,884 Millions of SDRs, 500 Percent of Quota
  - July 18, 2022 — Completion of Third Review: 1,884 Millions of SDRs, 500 Percent of Quota
  - Total available: 1,884 Millions of SDRs, 500 Percent of Quota

*Source: IMF staff calculations and Panamanian authorities as presented in the provided content unit.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Baseline scenario: trajectory and drivers
- Public debt declines from its peak in 2020 (66¼ percent of GDP) to 55¼ percent of GDP in 2026.
- Primary balance improves from a 7¾ of GDP deficit in 2020 to a ½ of GDP surplus in 2026.
- A consistently positive differential between real GDP growth and the real effective interest rate supports debt reduction.
- Gross financing needs peak at 15¼ percent of GDP and shrink to 5¾ percent of GDP in 2026 (slightly below the 2010–18 average of 6½ percent of GDP).
- Financing composition: net borrowing concentrated on medium- and long-term instruments (global bonds and multilateral debt).
- External vulnerabilities: external financing requirements and share of debt held by non-residents remain high over the projection horizon, but baseline assumes full access to international markets at a low spread on US debt.

### Stress tests and alternative shocks (baseline comparisons)
- Debt-to-GDP breaches the 70 percent threshold only under:
  - A one-standard deviation two-year growth shock → debt to GDP reaches 81 percent in 2023.
  - Crystallization of contingent liabilities from the financial sector (government bailouts to banks equal to 10 percent of outstanding credit to the private sector) → debt to GDP reaches 92 percent in 2023.
- In both shocks, debt-to-GDP declines after 2023.
- Calibrated shocks on real interest rates, primary balance, and the real exchange rate do not push debt above the 70 percent threshold.
- Gross financing needs breach the 15 percent of GDP benchmark only under the contingent liability shock (breach by 10 percent of GDP) in the year of occurrence (2022).
- Most relevant debt-profile vulnerability: high level of external financing requirements (76 percent in 2020), mainly due to considerable external liabilities (principally deposits) matched by sizeable liquid assets.

### Adverse scenario with PLL disbursed in 2021–22
- Scenario assumptions:
  - Nominal GDP growth lower in 2021–22 (almost 4 percent less in 2021 and 1.6 percent less in 2022).
  - Interest rates on new debt issues rise by around ½ percentage point in 2021 and 1 percentage point in 2022.
  - Temporary shock: nominal growth catches up with baseline from 2023; risk premium on public debt narrows and converges with baseline by end of projection period.
- Fiscal and financing impacts:
  - Public deficit expands from 7.4 percent of GDP in the baseline to 8.8 percent of GDP in 2021, and from 4 percent of GDP in the baseline to 4.6 percent of GDP in 2022.
  - Higher gross financing needs: by US$0.7 billion in 2021 and US$0.3 billion in 2022.
  - Refinancing difficulties reduce medium- and long-term bond issuances by US$1.2 billion in 2021 and US$1.6 billion in 2022.
  - Increased gross financing needs are met by drawing down the PLL (US$1.3 billion per year) and additional asset withdrawals of US$0.5 billion each year.
  - Financing from multilaterals other than the IMF assumed same as baseline in 2021–22.
- Debt outcome:
  - Public debt still peaks in 2020 and declines to 58 percent of GDP in 2026.
  - Under GDP shock and financial contingent liabilities shock, debt peaks at 84 percent and 96 percent of GDP respectively, then declines to 77 percent and 89 percent of GDP respectively.
  - Gross financing needs exceed the 15 percent of GDP threshold only under a contingent liability shock, reaching 25 percent of GDP in 2021 and declining to 10 percent of GDP by 2026.

### Quantitative highlights and calendar entries (as presented)
- Peak public debt: 2020 — 66¼ percent of GDP.
- Projected public debt: 2026 — 55¼ percent of GDP (baseline); 58 percent of GDP (adverse).
- Primary balance: 2020 — 7¾ of GDP deficit; 2026 — ½ of GDP surplus (baseline).
- Gross financing needs: peak at 15¼ percent of GDP; 2026 — 5¾ percent of GDP.
- External financing requirement: 76 percent in 2020.
- Stress-test peaks (selected):
  - Growth shock: debt-to-GDP 81 percent in 2023.
  - Contingent liabilities shock (10 percent of outstanding private credit): debt-to-GDP 92 percent in 2023 (baseline) and 96 percent in the adverse scenario (peak), gross financing needs up to 25 percent of GDP in shock year.

### Policy implications and government commitments (from Written Communication)
- Continue to implement the Social and Fiscal Responsibility Law (SFRL) and achieve gradual fiscal consolidation:
  - Target fiscal deficit: 7½ percent of GDP for 2021 and 4 percent of GDP for 2022.
  - Medium-Term Fiscal Framework under preparation to guide 2022 budget allocations.
- Treat the PLL as precautionary; draw only in event of unforeseen exogenous shocks.
- Priorities to bolster resilience, inclusiveness, and financial integrity:
  - Strengthen AML/CFT regime and complete FATF Action Plan items; target to adopt measures by end-October 2021 (structural benchmark).
  - Strengthen financial stability, public financial management, and data adequacy.
  - Withdraw COVID-19-related spending as recovery proceeds and strengthen revenue administration (modernization strategies in the DGI and Customs).
  - Restrain expenditure growth to facilitate fiscal consolidation.
- Specific FATF action plan elements (selected):
  - Strengthen understanding of ML/TF risk of legal persons and inform national policies.
  - Identify unlicensed money remitters; apply risk-based supervision to DNFBP sector; ensure effective sanctions for AML/CFT violations.
  - Ensure adequate verification and timely access to beneficial ownership information; monitor offshore entities; mitigate misuse of nominee shareholders and directors.
  - Ensure effective use of FIU products for ML investigations; demonstrate capability to investigate and prosecute ML involving foreign tax crimes; provide timely international cooperation; focus on ML investigations in high-risk areas identified in NRA and MER.

*Source: IMF staff.*

### 7. Panama’s banking system has remained resilient and well-regulated during the pandemic.

### 1panea2021005 - 7. Panama’s banking system has remained resilient and well-regulated during the pandemic.

### Banking system resilience and policy response
- A temporary moratorium on servicing bank loans was agreed with the banking community, originally through end-2020 and subsequently allowing an extended period of loan modification through mid-2021, including 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 provide timely liquidity and credit in times of financial stress.
- As of mid-June 2021, no commercial banks had used the liquidity facility under the FES.
- The temporary moratorium on servicing bank loans ended on June 30, 2021; authorities were closely following performance during the transition period ending in September 2021.
- Authorities requested a mission under the Financial Sector Assessment Program (FSAP) to continue strengthening financial sector regulation and supervision.

### Capitalization, liquidity, and asset quality
- Capital adequacy:
  - 15.7 percent as of end-2020 (compared to 15.2 percent as of end-2019), against a minimum of 8 percent.
  - 16.2 percent as of end-March 2021 (compared to 15.2 percent as of end-2019), against a minimum of 8 percent.
- Liquidity:
  - Short-term assets covered 64 percent of short-term deposits as of end-May 2021, more than twice the regulatory minimum of 30 percent.
  - Official banks’ liquidity buffers are defined as the ratio of liquid assets to net deposits; official banks (Banco Nacional de Panama and Caja de Ahorros) have maintained liquidity buffers significantly higher than the legal requirement and the indicative target.
- Asset quality:
  - The share of modified loans declined significantly since its peak in August 2020, reflecting a higher number of affected borrowers servicing their loan installments for three consecutive months.
  - Non-performing loans (NPLs) remained at just 2.0 percent through end-May 2021.

### Loan modification, provisioning, and regulatory measures
- To alleviate credit risks associated with the moratorium, Rule 9, 2020 required banks to create a provision equivalent to 3 percent of the gross modified loan portfolio.
- Banks had made higher provisions than required, amounting to 3.8 percent of the gross modified loan portfolio, on average, as of April 2021.
- Authorities remain committed to recalibrating the provisioning requirement in line with evolving circumstances and stand ready to make necessary adjustments to provisioning requirements if needed.

### Macroprudential stance and supervisory actions
- Macroprudential regulations will continue fostering financial system resilience to external shocks and preserving capitalization levels.
- The authorities continue strengthening risk-based supervision tools (offsite/onsite) for designated non-financial businesses and professions, prosecuting illegal money remitters, and taking dissuasive actions against AML/CFT violations.
- The financial intelligence unit (FIU) is strengthening investigative capability and capacity to prosecute tax crimes and money laundering, and to provide timely international cooperation.

### Related program context and implementation (PLL and technical support)
- The Precautionary and Liquidity Line (PLL) arrangement provided insurance against extreme pandemic risks while supporting institutional capacity building.
- IMF technical assistance is supporting bank resolution, crisis management preparedness, systemic and cyber security risk supervision, and macroprudential regulation.
- Authorities intend to treat the PLL as precautionary and would draw on it only in the event of an unforeseen exogenous shock.

*Source: 1panea2021005 - 7. Panama’s banking system has remained resilient and well-regulated during the pandemic.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1panea2021005.pdf_