## 1panea2022001 - 15.3 percent in 2021, and the growth momentum is expected to continue into 2022, reinforced

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### Executive summary and context
- Panama’s economy recovered strongly in 2021, driven by a rebound in domestic demand and higher copper exports.
- Real GDP grew by 15⅓ percent in 2021.
- Quarterly GDP surpassed pre-pandemic levels in Q4-2021.
- The Precautionary and Liquidity Line (PLL) arrangement is being treated as precautionary by the authorities and provides insurance against externally driven downside risks.
- Staff recommends completion of the Second PLL Review because:
  - All indicative targets and 2 out of 3 structural benchmarks have been met.
  - Panama continues to meet the PLL qualification criteria.
  - The Executive Board gave a generally positive assessment of Panama’s policies in the context of the 2021 Article IV Consultation and the First Review of the PLL Arrangement.
  - The authorities remain committed to implementing the policy agenda supported under the PLL arrangement.

### Recent developments and COVID-19
- IMF support since the start of the pandemic:
  - Rapid Financing Instrument (RFI): 100 percent of quota (SDR 0.377 billion or about US$0.5 billion) approved April 15, 2020.
  - PLL requested: 500 percent of quota (SDR 1.884 billion or about US$2.7 billion) approved January 19, 2021.
  - SDR allocation: SDR 0.361 billion (about US$0.5 billion) received August 23, 2021.
  - Overall IMF support since the start of the pandemic amounts to over 6¼ percent of GDP.
- COVID-19 waves and vaccination:
  - Panama experienced a fifth COVID-19 wave starting April 2022; Omicron peaked in February 2022.
  - Vaccination: vaccination rate exceeding 71 percent (for fully vaccinated people) with over 8 million administered doses as of end-May 2022.
  - New deaths in the fifth wave remained low compared with prior waves.

### Macroeconomic performance and outlook
- Recent performance:
  - 2020: Real GDP contracted by 17.9 percent.
  - Unemployment: spiked to 18½ percent in 2020 and fell to 11¼ percent in October 2021.
  - Real GDP expanded by 13.6 percent (y/y) in Q1-2022.
- Inflation:
  - Around -2 percent during much of 2020; by December 2021 inflation reached 2.6 percent.
  - By May 2022 inflation was 4.2 percent.
  - Core inflation remained at 1.1 percent.
- Outlook and projections:
  - Real output growth: 15⅓ percent for 2021; expected to expand by 7½ percent in 2022.
  - Medium term growth: potential growth rate of 5 percent.
  - Headline inflation: expected to increase to 4 percent (y/y) by end-2022 and gradually decline to 2 percent (y/y) over the medium term.
  - Current account deficit: projected to widen to about 3½ percent of GDP in 2022 and narrow to 2½ percent of GDP by 2027.
  - Baseline real GDP projections (selected): 2022 = 7.5; 2023–2027 = 5.0 each year.
  - Output gap (percent of potential): 2022 = -2.7; 2023 = -1.6; 2024–2027 = -0.5 to 0.0.

### Fiscal developments, strategy, and public debt
- Recent fiscal outcomes:
  - NFPS deficit: -10.5 percent of GDP in 2020 → -5.5 percent of GDP in 2021 (change of 5.0 percentage points); fiscal deficit improved by US$2.1 billion (from -5.7 to -3.5 billion US dollars).
  - Revenues: US$9.9 billion (2020) → US$11.6 billion (2021); change US$1.7 billion (79.3 percent of the deficit reduction).
  - Expenditures: US$15.5 billion (2020) → US$15.1 billion (2021); change -US$0.4 billion (−20.7 percent of the deficit reduction).
  - Capital expenditure: US$2.9 billion (2020) → US$2.4 billion (2021); change -US$0.5 billion (−23.8 percent).
- 2022 and medium-term fiscal framework:
  - 2022 budget: broadly consistent with a fiscal deficit of 4 percent of GDP (down from 5½ percent in 2021).
  - Fiscal deficit projected to fall to 3 percent of GDP in 2023 and converge to 1½ percent of GDP by 2025.
  - Authorities project revenue improvement of 1½ percent of GDP in 2022 attributable to: cyclical factors (36 percent), Panama Canal contributions (20 percent), mining royalties (16 percent), improvements in tax administration (16 percent), sales of land to the Canal (12 percent).
  - Staff projections (fiscal accounts, percent of GDP, 2022 Proj. vs 2022 Budget and 2021 Actual):
    - Revenues: 2021 Actual 18.2; 2022 Budget 20.4; 2022 Proj. 19.7.
    - Expenditures: 23.7; 24.4; 23.7.
    - Capital expenditure: 3.8; 4.8; 4.8.
    - Fiscal Balance: -5.5; -4.0; -4.0.
- Debt dynamics and projections:
  - NFPS debt: 65½ percent of GDP in 2020 → expected to decline to 49½ percent of GDP in 2027 under the fiscal rule.
  - Central Government Gross Debt (percent of GDP): 2020 = 72.2; 2021 = 64.1; 2027 = 53.1.
  - Debt of Non-Financial Public Sector (Gross Debt, percent of GDP): 2019 = 41.9; 2020 = 65.6; 2021 = 58.4; 2027 = 49.5.
  - Medium-term consolidation to be based primarily on revenue administration improvements and primary expenditure growth below nominal GDP rates.
  - Identified revenue measures: removing some CIT exemptions, setting a minimum CIT effective rate, eliminating some VAT exemptions; DGI estimates these measures could yield around US$1.3 billion over 2022–25 (about 2 percent of GDP).

### Financial sector soundness, liquidity, and supervision
- Banking sector indicators (selected):
  - NPL ratio: 2.5 percent in March 2022 (2.3 percent at end-2021).
  - Loan-loss provision-to-NPL ratio: 157 percent in March 2022 (174 percent at end-2021 reported elsewhere).
  - Modified loans-to-total loans: 11.9 percent in March 2022 (peak of 47½ percent in July 2020).
  - Total regulatory capital adequacy ratio: 15.3 percent in March 2022 (15.8 percent as of end-2021); regulatory minimum requirement is 8 percent.
  - Liquidity: short-term assets covered 58.5 percent of short-term deposits as of end-May 2022 (regulatory minimum is 30 percent).
  - Private credit growth: 3.2 percent (y/y) in March 2022 (1.5 percent at end-2021).
  - System-level aggregates (US$ mn): Private sector credit 2021 = 54,281; 2022 (proj) = 56,619. Total deposits 2021 = 47,811; 2022 (proj) = 53,053.
- Supervisory and macroprudential priorities:
  - Continue tight supervision and monitoring, including a risk-focused loan portfolio examination of all banks.
  - Recalibrate provisioning requirements on modified loans; stand ready to increase provisioning—particularly for banks with high exposure to modified loans.
  - Medium-term implementation of Basel III capital conservation buffer and net stable funding ratio.
  - Expand macroprudential toolkit to increase resilience across the business cycle.
  - FSAP planned for 2023; IMF technical assistance requested to enhance regulatory, supervisory, and macroprudential frameworks.

### AML/CFT, FATF progress, and beneficial ownership
- FATF status and actions:
  - FATF expressed significant concern in October 2021 that Panama had failed to complete its action plan and urged significant progress by June 2022.
  - By June 2022 plenary, “largely addressed” action items increased from 8 to 11 (out of 15; and 5 at the time of the first review), but Panama remained on the FATF grey list.
  - Authorities committed to implementing all remaining items on the FATF action plan by end-2022.
- Legal and operational reforms:
  - Law 254: approved October 26, 2021; enacted November 11, 2021.
  - Sectoral risk assessment: approved November 23, 2021; launched December 6, 2021.
  - SSNF supervision plan and Supervision Manual implemented; increased onsite and offsite supervisions.
  - Beneficial ownership compilation: computer system began operations early April 2022; as of June 27, 2022 beneficial ownership information collected for 18,922 firms; as of July 5 a total of 20,545 companies uploaded their information in the Beneficial Ownership Registry.
- Enforcement outcomes:
  - Money laundering investigations: 36 relevant cases prosecuted; 8 arrest warrants issued; 231 persons accused.
  - Assets confiscated exceeding US$60 million from 27 of the 36 cases; in another 7 cases assets confiscated for an approximate amount of US$30 million.

### PLL performance, conditionality, and availability
- PLL amount and access:
  - Requested: 500 percent of quota (SDR 1.884 billion or about US$2.7 billion).
  - One half of the PLL amount (SDR 942 million) was available after approval; the full amount (SDR 1,884 million) becomes available after completion of this second review.
- Performance under the PLL:
  - All indicative targets for this review were met with large margins.
  - Structural benchmarks met timely: publishing the international reserves template; resuming quarterly publication of fiscal operations.
  - One structural benchmark missed at end-October 2021 (AML/CFT measures), with satisfactory subsequent progress and a prior action to upload at least 18,000 companies to the ultimate beneficial ownership registry.
- Liquidity and buffers:
  - National government deposits at the National Bank of Panama: US$2.6 billion at end-September 2021 and US$4 billion at end-March 2022 (minimum indicative target US$1.0 billion).
  - Ratio of liquid assets (up to 186 days) of official banks to total net deposits (up to 186 days): 80½ percent at end-September 2021 and 82.2 percent at end-March 2022 (minimum indicative target 30 percent).

### Risks, stress tests, and downside scenarios
- Balance of risks tilted to the downside due to:
  - Escalation of the Ukrainian-Russian conflict, inflationary pressures prompting faster central bank tightening, higher crude oil prices, and more contagious COVID-19 variants.
  - Insufficient progress on the FATF Action Plan and EU non-cooperative listing risks affecting correspondent banking relationships and overseas credit channels.
  - Security and climate risks: cyberattacks and more frequent/severe climate-change related natural disasters could disrupt Canal activity, agriculture, and tourism.
- Debt stress test outcomes (selected):
  - One-standard deviation two-year growth shock: debt-to-GDP reaches 73 percent in 2024.
  - Crystallization of contingent liabilities from the financial sector—government bailouts equal to 10 percent of outstanding credit to the private sector—would raise debt up to 82 percent in 2024.
  - Adverse scenario: nominal GDP growth lower in 2022 by 3.5 percent (relative to baseline); interest rates on new debt issues rise by almost 1 point in 2022; public deficit expands to 5.7 percent of GDP in 2022 (baseline 4 percent); under adverse scenarios public debt still peaks in 2020 and declines to 52 percent of GDP in 2027.

### Data adequacy, statistical reforms, and SDDS plans
- Progress toward SDDS subscription and statistical improvements:
  - Structural benchmarks achieved ahead of time: publication of international reserves template; resumed quarterly publication of fiscal operations of Central Government and General Government at INEC (met end-November 2021).
  - Ongoing improvements: depository corporation survey, interest rates including government securities rates, fiscal data timeliness, and IMAE timeliness.
  - Authorities on-track to achieve SDDS status expected for end-2022.
- ROSC and capacity building:
  - Authorities implementing recommendations of the 2020 ROSC mission and committed to SDDS subscription by end-2022.
  - Data category priorities: National Accounts benchmark update, consumer price index resources, government finance statistics (ISTMO fixes), and balance of payments enhancements.

### Staff appraisal and recommendations
- Staff appraisal highlights:
  - Continued strong policies and commitment under the PLL will help alleviate vulnerabilities, strengthen the recovery, and enhance market confidence.
  - Panama continues to meet PLL qualification criteria: performs strongly in 3 out of 5 PLL areas (external, fiscal, monetary) and does not substantially underperform in the other 2 areas (financial and data).
- Policy recommendations for authorities:
  - Continue treating the PLL arrangement as precautionary.
  - Continue to commit to the fiscal rule and gradual fiscal consolidation.
  - Strengthen revenue mobilization and contain current expenditure while prioritizing and appropriately targeting capital and social spending.
  - Implement contingency planning to alleviate risks to the budget.
  - Strengthen public financial management and fiscal transparency.
  - Avoid further delays in implementing the FATF action plan and address remaining deficiencies in the AML/CFT regulatory framework.
  - Strengthen regulatory, supervisory, and macroprudential policy frameworks.

### Recommendation
- "Against this background, staff recommends the completion of the Second PLL Review."
- There will not be a third review as the PLL arrangement expires on January 18, 2023.

*PANAMA — SECOND REVIEW UNDER THE ARRANGEMENT UNDER THE PRECAUTIONARY AND LIQUIDITY LINE. IMF staff report, June 27, 2022.*

### 15.3 percent in 2021, and the growth momentum is expected to continue into 2022, reinforced

### 1panea2022001 - 15.3 percent in 2021, and the growth momentum is expected to continue into 2022, reinforced

### Executive summary and context
- Panama’s economy recovered strongly in 2021, driven by a rebound in domestic demand and higher copper exports.
- Real GDP grew by 15⅓ percent in 2021.
- Quarterly GDP surpassed pre-pandemic levels in Q4-2021.
- The recovery is expected to continue into 2022 but remains subject to elevated risks, including global uncertainties arising from the war in Ukraine, faster-than-expected US monetary tightening, tighter global financial conditions, higher crude oil prices, and new variants of the COVID-19 virus.
- The Precautionary and Liquidity Line (PLL) arrangement is being treated as precautionary by the authorities and provides insurance against externally driven downside risks.
- Staff recommends completion of the Second PLL Review because:
  - All indicative targets and 2 out of 3 structural benchmarks have been met.
  - Panama continues to meet the PLL qualification criteria.
  - The Executive Board gave a generally positive assessment of Panama’s policies in the context of the 2021 Article IV Consultation and the First Review of the PLL Arrangement.
  - The authorities remain committed to implementing the policy agenda supported under the PLL arrangement.

### Recent developments and COVID-19
- The Fund provided support under the Rapid Financing Instrument (RFI) for 100 percent of quota (SDR 0.377 billion or about US$0.5 billion) approved on April 15, 2020.
- The PLL arrangement was requested for 500 percent of quota (SDR 1.884 billion or about US$2.7 billion) and approved on January 19, 2021.
- As part of the SDR allocation, Panama received SDR 0.361 billion (about US$0.5 billion) on August 23, 2021.
- Overall IMF support since the start of the pandemic amounts to over 6¼ percent of GDP.
- Panama experienced a fifth COVID-19 wave starting April 2022; the fourth wave (Omicron) peaked in February 2022.
- Vaccination: vaccination rate exceeding 71 percent (for fully vaccinated people) with over 8 million administered doses as of end-May 2022.
- New deaths in the fifth wave remained low compared with prior waves.

### Macroeconomic performance and outlook
- 2020: Real GDP contracted by 17.9 percent (the largest contraction in recorded history).
- Unemployment spiked to 18½ percent in 2020 and fell to 11¼ percent in October 2021.
- Real GDP expanded by 13.6 percent (y/y) in Q1-2022.
- Inflation:
  - Around -2 percent during much of 2020; by December 2021 inflation reached 2.6 percent.
  - By May 2022 inflation was 4.2 percent.
  - Core inflation remained at 1.1 percent.
- External imbalances remain contained; the outlook is favorable but subject to the aforementioned risks.

### Fiscal developments and policy priorities
- NFPS deficit:
  - Fell from 10½ percent in 2020 to 5½ percent of GDP in 2021 — below the fiscal rule limit (a fiscal deficit between 7 and 7½ percent of GDP).
  - Fiscal deficit improved by 2.1 billion US dollars between 2020 and 2021 (from -5.7 to -3.5 billion US dollars).
  - In percent of GDP: from -10.5 to -5.5 (change of 5.0 percentage points).
- Revenue and expenditure drivers for 2021:
  - Revenues: 9.9 (2020) to 11.6 (2021) billion US dollars; change 1.7 (79.3 percent of the deficit reduction).
  - Cyclical effects: 0.9 billion US dollars (40.7 percent of the revenue increase).
  - One-offs (including capital gains, Canal contributions, and tax amnesty) contributed materially to revenue.
  - Expenditures: 15.5 (2020) to 15.1 (2021) billion US dollars; change -0.4 (−20.7 percent of the deficit reduction).
  - COVID-19 related spending: 1.6 billion US dollars in both 2020 and 2021 (no change).
  - Non-COVID-19 related: 13.9 (2020) to 13.5 (2021) billion US dollars.
  - Capital expenditure: 2.9 (2020) to 2.4 (2021) billion US dollars; change -0.5 (−23.8 percent).
- Q1-2022 preliminary fiscal data:
  - NFPS deficit reduced from 1.8 to 1.5 percent of GDP (Q1-2021 to Q1-2022).
  - Tax revenue collection up by 20 percent y/y (about 3 percent of 2021Q1 GDP).
  - Current spending growth restrained (by 0.4 percent y/y).
  - Capital expenditure execution increased by 65 percent y/y (about 2.7 percent of Q1-2021 GDP), concentrated in investment spending and social spending via Panamá Solidario.
- Policy priorities under the PLL:
  - Boost the post-pandemic recovery.
  - Support an adequate level of spending on health and social needs.
  - Fortify financial stability.
  - Further strengthen institutional policy frameworks, including financial integrity and data adequacy.
  - Continue adhering to the amended fiscal rule which safeguards debt sustainability over the medium term.
  - Strengthen revenue mobilization and contain current expenditure while prioritizing and appropriately targeting capital and social spending.
  - Strengthen public financial management and fiscal transparency.

### Financial sector, AML/CFT, and institutional reforms
- Banking sector metrics:
  - NPL ratio: 2.5 percent in March 2022 (2.3 percent at end-2021).
  - Loan-loss provision-to-NPL ratio: 157 percent in March 2022.
  - Modified loans-to-total loans: 11.9 percent in March 2022 (peak of 47½ percent in July 2020).
  - Total regulatory capital adequacy ratio: 15.3 percent in March 2022 (15.8 percent as of end-2021); regulatory minimum requirement is 8 percent.
  - Liquidity: short-term assets covered 58.5 percent of short-term deposits as of end-May 2022 (regulatory minimum is 30 percent).
  - Private credit growth: 3.2 percent (y/y) in March 2022 (1.5 percent at end-2021).
- AML/CFT and FATF:
  - Avoiding further delays in implementing the FATF action plan and related reputational risks would support an exit from the FATF grey list.
  - The end-October 2021 structural benchmark on adopting measures to strengthen the effectiveness of the AML/CFT regime was not met at that time, but satisfactory progress has been achieved since then.
  - Authorities committed to strengthening the effectiveness of the AML/CFT regime, transparency of legal persons and legal arrangements including for beneficial ownership information, data adequacy and statistics reporting, multi-annual budgeting, and financial sector regulation and supervision.
- Indicators of eligibility and performance:
  - Staff assesses Panama performs strongly in 3 out of the 5 PLL qualification areas (external, fiscal, and monetary) and does not substantially underperform in the other 2 areas (financial and data).

### PLL technical and conditionality details
- PLL amount and access:
  - Requested: 500 percent of quota (SDR 1.884 billion or about US$2.7 billion).
  - One half of the PLL amount (SDR 942 million) was available after approval; the full amount (SDR 1,884 million) becomes available after completion of this second review.
- Conditionality and monitoring:
  - Quantitative indicative targets on banking buffers and government deposits were met.
  - Structural benchmarks observed: publishing the international reserves template; publishing quarterly fiscal data.
  - One structural benchmark missed at end-October 2021 (AML/CFT measures), with satisfactory subsequent progress.

### Staff appraisal highlights and recommendations
- Continued strong policies and commitment under the PLL will help to alleviate vulnerabilities, strengthen the recovery, and enhance market confidence.
- Authorities should:
  - Continue treating the PLL arrangement as precautionary.
  - Continue to commit to the fiscal rule and gradual fiscal consolidation.
  - Strengthen revenue mobilization and contain current expenditure.
  - Prioritize and appropriately target capital and social spending.
  - Implement contingency planning to alleviate risks to the budget.
  - Strengthen public financial management and fiscal transparency.
  - Avoid further delays in implementing the FATF action plan and address remaining deficiencies in the AML/CFT regulatory framework.
  - Strengthen regulatory, supervisory, and macroprudential policy frameworks.

*PANAMA — SECOND REVIEW UNDER THE ARRANGEMENT UNDER THE PRECAUTIONARY AND LIQUIDITY LINE. IMF staff report, June 27, 2022.*

### 7.      The external position remains strong. The current account balance switched from a

### 1panea2022001 - 7.      The external position remains strong. The current account balance switched from a

### External position and recent dynamics
- The current account balance switched from a surplus of 2 ¼ percent of GDP in 2020 to a deficit of 2¼ percent of GDP in 2021, mainly driven by a recovery in imports which offset stronger exports from copper and the Colon Free Zone.
- The trade deficit continued to widen in Q1-2022 as imports surged more than  50 percent compared to Q1-2021, on the back of higher oil and food prices.
- Capital inflows (mostly in the form of foreign direct investment) have helped to finance the current account deficit and reinforced external buffers.
- The external position was assessed in the 2021 Article IV consultation to be moderately stronger than the level implied by fundamentals and desirable policy settings, confirmed by a recent update (Annex II).
- The real effective exchange rate has depreciated since 2020 and remained stable.

### FATF, AML/CFT, and related measures
- In October 2021, the FATF expressed significant concern that Panama had failed to complete its action plan and strongly urged Panama to demonstrate significant progress by June 2022 or the FATF would consider next steps, which could include calling on members to apply enhanced due diligence to business relations and transactions with Panama.
- At the closing of the March 2022 plenary, the FATF continued urging Panama to demonstrate significant progress in completing its action plan by June 2022.
- Since the first PLL review, Panama has made important progress but not enough to be removed from the FATF grey list.
- At the June 2022 plenary meeting, the FATF increased the number of “largely addressed” action items from 8 to 11 (out of 15; and 5 at the time of the first review), but reiterated concern that Panama had not fully implemented its action plan.
- New legislation (approved in November 2021) will help ease concerns of partner countries and strengthen the exchange of tax information.

### Outlook and key macro projections
- Growth:
  - Real output growth of 15⅓ percent for 2021.
  - Real GDP is expected to expand by 7½ percent in 2022.
  - Over the medium term, growth is expected to moderate to an estimated potential growth rate of 5 percent.
  - Economic activity will be bolstered by the resumption of construction of a new metro line and recovering private investment.
- Inflation:
  - Headline inflation is expected to increase to 4 percent (y/y) by end-2022 and gradually decline to 2 percent (y/y) over the medium term.
- Fiscal:
  - The 2022 budget is broadly consistent with a fiscal deficit of 4 percent of GDP (down from 5½ percent in 2021).
  - Fiscal deficit projected to fall to 3 percent of GDP in 2023 and converge to the medium-term target of 1½ percent of GDP by 2025.
  - Reduction driven by revenue administration improvements and moderation of primary expenditure growth.
- External:
  - Current account deficit projected to widen to about 3½ percent of GDP in 2022.
  - Over the medium term, the current account deficit projected to narrow to 2½ percent of GDP by 2027.
  - Drivers: moderation of private investment and strengthening in domestic savings.

### Downside risks
- Balance of risks remains tilted to the downside due to:
  - Escalation of the Ukrainian-Russian conflict, inflationary pressures prompting faster central bank tightening, higher crude oil prices, and more contagious COVID-19 variants.
- Specific risk channels:
  - Slowdown: global slowdown, intensified war in Ukraine, and attendant sanctions could raise fuel prices, affect Canal traffic and inflation, and lead to market dislocations and spikes in sovereign bond yields.
  - Listings: Insufficient progress on FATF Action Plan and remaining EU non-cooperative listing risks could affect correspondent banking relationships and overseas credit channels.
  - Security and climate risks: cyberattacks and more frequent/severe climate-change related natural disasters could disrupt Canal activity, agriculture, and tourism.

### Review of PLL qualification
- Economic fundamentals and institutional policy frameworks remain sound; policy commitments to address remaining vulnerabilities are strong.
- Since the PLL approval (January 2021) and First PLL Review (July 2021), indicators have improved, and buffers remain strong.
- The Executive Board gave a generally positive assessment of Panama’s policies in the 2021 Article IV Consultation.
- Delays in fully implementing the FATF action plan underscore the need for continued supportive measures and a prior action on this issue.
- Panama continues to meet the PLL qualification criteria:
  - Performs strongly in three out of five PLL qualification areas (external, fiscal and monetary).
  - Does not substantially underperform in the other two areas (financial sector and data adequacy).
  - Financial sector remains sound; banks are well capitalized and liquid.
  - Main reason for not performing strongly in one area is continued presence on the FATF grey list; expected supportive measures to address remaining items in the FATF action plan expected for end-2022.
  - On data adequacy, Panama is on-track to achieve SDDS status (expected for end-2022), which would increase strong-performing PLL areas from three to four.
  - Recent publication of the data template for international reserves and foreign currency liquidity as well as fiscal data is an important step toward SDDS subscription.

### Performance under the PLL arrangement
- All indicative targets for this review continued to be met, with large margins.
- Government deposits coverage:
  - National government deposits at the National Bank of Panama (BNP) stood at US$2.6 billion at end-September 2021 and US$4 billion at end-March 2022, well above the minimum indicative target of US$1.0 billion.
- Public banks liquidity buffers:
  - Ratio of liquid assets (up to 186 days) of official banks to total net deposits (up to 186 days) of the same banks stood at 80½ percent at end-September 2021 and 82.2 percent at end-March 2022, well above the minimum indicative target of 30 percent.

### Structural benchmarks and prior action
- Reserve template:
  - End-September 2021 structural benchmark on publishing the data template on International Reserves and Foreign Currency Liquidity was timely met and published in the NSDP.
- AML/CFT measures:
  - End-October 2021 structural benchmark on adopting measures to strengthen the effectiveness of the AML/CFT regime was not met at that time; limited progress led to delay of the 2nd review under the PLL arrangement.
  - Important progress since then justifies completion of the second review, including expected observance of the prior action to upload at least 18,000 companies to the ultimate beneficial ownership registry.
- Fiscal data:
  - End-March 2022 structural benchmark on resuming quarterly publication of fiscal operations of the Central Government and General Government was observed ahead of time at end-November 2021.
- Prior Action:
  - The Superintendency of Non-Financial Entities (SSNF) will identify and compile information maintained by law firms acting as resident agents on companies and their beneficial owners and upload at least 18,000 companies to the registry, with corresponding beneficial ownership information.

### Policies under the PLL and fiscal strategy
- Authorities’ priorities:
  - Intensify COVID-19 vaccination program.
  - Reduce poverty and inequality, broaden social inclusion, enhance productivity, and adhere to climate change strategies.
  - Mitigate impact of rising food and energy prices by extending and expanding electricity subsidy program through June 2022 and continue social support transfers via Panamá Solidario.
- Re-anchoring fiscal policy:
  - Authorities fully committed to the fiscal rule requiring tax administration improvements to guide gradual fiscal adjustment and ensure debt sustainability while minimizing growth impact.
  - 2022 budget consistent with a 4 percent of GDP deficit, in compliance with the fiscal responsibility law (SFRL).
  - Authorities’ revenue improvement of 1½ percent of GDP in 2022 is due to:
    - (i) cyclical factors (36 percent);
    - (ii) higher contributions from the Panama Canal (20 percent);
    - (iii) mining royalties (16 percent);
    - (iv) improvements in tax administration (16 percent);
    - (v) sales of land to the Canal (12 percent).
  - Revenue administration measures in 2022 include enhancement in estimation and collection of labor income withholdings, implementation of the Placef system to receive real-time transaction data flows, better systems for recovery of tax debt and expedition of judiciary processes for tax delinquency.
  - Authorities preparing 2023 budget with a deficit of 3 percent of GDP in line with the fiscal rule.
- Staff projections vs. budget (fiscal accounts, in percent of GDP):
  - Revenues: 2021 Actual 18.2; 2022 Budget 20.4; 2022 Proj. 19.7; Differences: (C-B) -0.7; (C-A) 1.6.
  - Current revenues: 18.2; 19.6; 19.2; -0.4; 1.0.
  - Tax revenues: 7.1; 8.4; 7.8; -0.6; 0.7.
  - Non-tax revenues: 11.1; 11.2; 11.4; 0.2; 0.3.
  - Capital revenues: 0.0; 0.9; 0.6; -0.3; 0.6.
  - Expenditures: 23.7; 24.4; 23.7; -0.7; --.
  - COVID-19 related: 2.5; 0.9; 0.9; --; -1.6.
  - Non-COVID-19 related: 21.2; 23.5; 22.8; -0.7; 1.6.
  - Current primary: 15.0; 15.8; 15.5; -0.3; 0.5.
  - Interest payments: 2.4; 2.9; 2.6; -0.3; 0.2.
  - Capital expenditure: 3.8; 4.8; 4.8; --; 1.0.
  - Fiscal Balance: -5.5; -4.0; -4.0; --; 1.5.
- Medium-term fiscal framework:
  - Consolidation to be based primarily on revenue administration improvements and primary expenditure growth below nominal GDP rates.
  - Authorities considering broadening tax bases by removing some CIT exemptions, setting a minimum CIT effective rate, and eliminating some VAT exemptions.
  - DGI’s estimates: these measures could yield around US$1.3 billion over 2022–25 (about 2 percent of GDP).
  - Identified need for capacity building in revenue forecasting, development of a Large Taxpayer Unit, and transparent monitoring with performance indicators; IMF providing technical assistance.
- Debt sustainability:
  - Strong implementation of the fiscal rule is expected to reduce NFPS debt from 65½ percent of GDP in 2020 to 49½ percent of GDP in 2027.
  - This relies on a primary fiscal balance envisaged under the fiscal rule (a surplus of around 0.6-0.7 percent of GDP in 2025 and thereafter) that is much higher than the debt-stabilizing primary balance (a deficit of around ...).

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1panea2022001.pdf*

### 0.4 percent of GDP, see Annex III for a

### 1panea2022001 - 0.4 percent of GDP, see Annex III for a

### Enhancing financial integrity
- Objective: Exit the FATF grey list by end-2022; authorities committed to implementing all remaining items on the FATF action plan by end-2022.
- Key legislative and supervisory actions:
  - Approval of Law 254: approved by the National Assembly on October 26, 2021 and enacted by President Cortizo on November 11, 2021.
  - Update of sectoral risk assessment: approved on November 23, 2021; launched December 6, 2021.
  - Implementation of the SSNF supervision plan and Supervision Manual: increased number of onsite and offsite supervisions, follow-up actions, identification of noncompliance, imposition of sanctions, and an increase in suspicious transaction reports and follow-up supervisory activities during Q1-2022.
  - Use of the Practical Guide for Parallel Financial Investigations: led to a vastly increased number of parallel financial investigations with concrete results.
  - Improvement of risk-based monitoring and supervision of the corporate sector: prioritized high-risk resident agents and increased inspections planned for the rest of 2022.
  - Compiling beneficial ownership information: computer system began operations in early April 2022; as of June 27, 2022, beneficial ownership information collected for 18,922 firms; continuation planned to cover all active registered firms under Law 254.
- Enforcement and outcomes:
  - Focus on money laundering investigations in high-risk areas: 36 relevant cases prosecuted; 8 arrest warrants issued; 231 persons accused; assets confiscated exceeding US$60 million derived from 27 of the 36 cases; in another 7 cases, assets confiscated for an approximate amount of US$30 million.
- Additional commitments:
  - Authorities committed to implement the remaining FATF action plan items by end-2022 to strengthen AML/CFT effectiveness and support exit from the FATF list.
  - Continued engagement with EU partners to resolve Panama’s blacklisting as a non-cooperative jurisdiction for tax purposes; implementation of Law 254 expected to address outstanding EU issues.

### Fiscal measures, revenue mobilization, and public debt implications
- Tax and fiscal policy issues:
  - Tax arrears accumulated over the last few years of close to 4 percent of GDP.
  - Tax expenditures estimated at close to 4 percent of GDP.
  - Staff estimates: combined budgetary impact of strengthening tax enforcement and rationalizing tax expenditures is conservative at about 2 percent of GDP (cumulatively until 2027).
- Public financial management (PFM) reforms:
  - All arrears identified in 2019–20 stocktaking exercises have been settled.
  - MEF implementing a comprehensive PFM Action Plan; draft General Budget Law submitted to the Assembly in January 2022.
  - General Budget Law features:
    - (i) a new performance-based budgeting framework;
    - (ii) a medium-term budget framework with binding ceilings for the first year and indicative for outer years;
    - (iii) more flexible procedures to transfer payment of authorized spending commitments to next year’s budget;
    - (iv) nullity of any spending commitment above budget appropriations and strengthened sanctions.
  - Fund technical assistance to support implementation, including expenditure control, accounting, medium-term revenue mobilization program, revenue forecasting, and monitoring and risk-based audit of large taxpayers.
- Fiscal transparency and data integrity:
  - Need to improve quarterly fiscal reports, compliance with accrual criteria, and clarity of budget documentation.
  - Final COVID-19 audit for 2020–21 should be completed and published.
- Debt sustainability projection:
  - Under the gradual fiscal consolidation following the SFRL, NFPS debt burden expected to decline to below 50 percent of GDP by 2027.
  - (Refer to Annex III for a detailed debt sustainability analysis.)

### Fortifying financial stability
- Supervisory and macroprudential priorities:
  - Continue tight supervision and monitoring, including a risk-focused loan portfolio examination of all banks to assess asset quality, credit risk, and capital buffers.
  - Frequent monitoring of modified loans and progress in restructuring to underpin recalibration of provisioning requirements on modified loans.
  - Authorities should stand ready to increase provisioning requirements—particularly for banks with high exposure to modified loans—to ensure sufficient buffers.
  - Medium-term implementation of Basel III capital conservation buffer and net stable funding ratio to strengthen capital and liquidity buffers.
  - Expand macroprudential policy toolkit to increase resilience across the business cycle and prevent major disruptions in credit and other financial services.
- Technical assistance and assessments:
  - Authorities have requested IMF technical assistance to enhance regulatory, supervisory, and macroprudential frameworks.
  - A Financial Sector Assessment Program (FSAP) is planned for 2023.

### Strengthening data adequacy and statistical capacity
- Progress toward SDDS subscription and statistical improvements:
  - Statistical-related structural benchmarks achieved ahead of time and strong progress toward SDDS subscription (Annex VI).
  - Revamp of the National Statistical Council (NSC) and implementation of the National Statistical Plan for 2021–25.
  - Structural benchmark: resumed quarterly publication of Fiscal Operations of Central Government and General Government (adding financing data) at the National Statistics Institute met at end-November 2021 (target March 31, 2022).
  - Advances in timely dissemination of the reserve template (structural benchmark), depository corporation survey, interest rates including rates of government securities, and fiscal data.
  - Ongoing efforts to secure timely source data to improve timeliness of the IMAE (production index) in line with SDDS requirements; IMAE timeliness is a key pending requirement.
- ROSC recommendations:
  - Authorities implementing recommendations of the 2020 ROSC mission and committed to SDDS subscription by end-2022.

### PLL issues, capacity to repay, and exit strategy
- PLL arrangement status:
  - No third PLL review: delays mean the third review cannot be completed before the PLL arrangement ends on January 18, 2023 and the arrangement cannot be extended.
- Capacity to repay the Fund:
  - If Panama drew the entire PLL amount, capacity to repay would be adequate; credit and liquidity risks to the Fund would remain low (Table 9).
  - Fund obligations would represent a maximum of 2.7 percent of Panama's total external debt over the projection period, 30.5 percent of gross international reserves, and 10.2 percent of exports.
- Safeguards assessment:
  - BNP implemented all recommendations from the first-time safeguards assessment completed in September 2020.
  - Legal framework for operationalizing the FES approved; plan to strengthen control procedures based on internal audit review; capacity building plan to reinforce internal audit in progress.
- Exit strategy:
  - Authorities intend to communicate their exit strategy from the PLL arrangement.
  - Under the baseline scenario, by end of the arrangement the primary fiscal deficit would fall below the debt-stabilizing balance, public sector financing needs would be greatly reduced, public debt would be on a downward path, and the current account deficit would be close to what would be expected for an emerging market country like Panama.
  - Authorities affirm intention not to make permanent use of the PLL and to treat it as precautionary while continuing reforms to improve competitiveness, reduce poverty and inequality, and address climate risks.

### Staff appraisal and outlook
- PLL qualification and policy implementation:
  - Panama continues to meet PLL qualification criteria; performs strongly in three of five PLL qualification areas (external, fiscal, monetary) and does not substantially underperform in the other two (financial and data).
  - Policies under the PLL are on track: end-September 2021 and end-March 2022 indicative targets met; end-September 2021 and end-March 2022 structural benchmarks on data publication met; end-October 2021 structural benchmark on AML/CFT effectiveness was not met but significant actions have since been taken.
- Risks and resilience:
  - External risks remain elevated (spillovers from the war in Ukraine, faster-than-expected monetary tightening, pandemic evolution), but external imbalances are contained and fiscal consolidation is on track.
  - Gradual fiscal consolidation and agreed budgetary measures supported by IMF technical assistance expected to reduce NFPS debt below 50 percent of GDP by 2027.
- Policy and institutional reforms advancing:
  - Authorities progressing on the General Budget Law to bolster fiscal credibility and reduce risk of future arrears.
  - Continued strengthening of financial sector supervision, macro-financial stress testing, and implementation of FSAP recommendations.
  - Priority remains exiting the FATF grey list and achieving SDDS subscription by end-2022.

*Source: IMF staff report excerpt (1panea2022001).*

### 30.      Against this background, staff recommends the completion of the Second PLL Review.

### Panama: Second PLL Review Recommendation and Macroeconomic Assessment

### Recommendation
- "Against this background, staff recommends the completion of the Second PLL Review."
- There will not be a third review as the PLL arrangement expires after six months, on January 18, 2023.
- PLL availability and reviews (Table 10):
  - January 19, 2021 — Approval of the PLL arrangement — 942 Millions of SDRs (250 Percent of Quota)
  - 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) — note: with the second review in mid-July 2022, there will no third review as the PLL expires on January 18, 2023.
  - Total available under the arrangement: 1,884 Millions of SDRs (500 Percent of Quota)

### Real Sector Developments
- Deep contraction in 2020 and strong rebound in 2021:
  - Real GDP growth: 2019 = 3.0; 2020 = -17.9; 2021 = 15.3; 2022 (proj) = 7.5; 2023–2027 = 5.0 each year.
  - Output gap (% of potential): 2019 = 5.8; 2020 = -16.0; 2021 = -6.3; 2022 = -2.7; 2023 = -1.6; 2024–2027 = -0.5 to 0.0.
- Demand-side contributions (Table 1, selected):
  - Private consumption: 2019 = 4.9; 2020 = -15.5; 2021 = 3.9; 2022 = 14.3.
  - Private investment: 2019 = -0.9; 2020 = -45.4; 2021 = 51.9; 2022 = 10.1.
  - Public investment (percent change): 2019 = 1.0; 2020 = -62.4; 2021 = 96.5; 2022 = 36.1.
- Prices and labor:
  - Consumer price index (average): 2019 = -0.4; 2020 = -1.6; 2021 = 1.6; 2022 = 3.2; 2023 = 3.4.
  - Total unemployment rate (October, 2021): 11.3 percent.
- Demographics and welfare:
  - Population (millions, 2021): 4.3.
  - GDP per capita (US$, 2021): 14,664.
  - Poverty line (percent, 2019): 21.5.
  - Life expectancy at birth (years, 2019): 78.5.
  - Adult literacy rate (percent, 2019): 95.7.

### Fiscal Developments and Public Debt
- Fiscal balances and trends (Table 1 and Table 2):
  - NFPS overall balance (incl. ACP): 2019 = -3.1; 2020 = -9.4; 2021 = -5.4; 2022 (proj) = -3.8; 2023 = -2.7; 2024 = -1.8; 2025–2027 = -1.1 to -0.9.
  - NFPS primary balance (excl. ACP, memorandum): 2021 = -3.5; 2022 = -1.9; 2023 = -0.9; 2024 = 0.1; 2025 = 0.7; 2026 = 0.6; 2027 = 0.6.
- Revenue and expenditure (NFPS, percent of GDP):
  - Revenue and grants: 2019 = 20.8; 2020 = 21.5; 2021 = 20.5; 2022 = 23.0; 2023 = 23.2.
  - Expenditure: 2019 = 23.9; 2020 = 30.8; 2021 = 25.9; 2022 = 26.8; 2023 = 25.8.
  - COVID-19 related expenditure (NFPS): 2019 = 0.9; 2020 = 0.0; 2021 = 0.0; 2022 onward = 0.0.
- Public debt dynamics (Table 4):
  - Debt of Non-Financial Public Sector (Gross Debt, percent of GDP): 2019 = 41.9; 2020 = 65.6; 2021 = 58.4; 2022 = 56.0; 2023 = 54.8; 2024 = 53.4; 2025 = 52.1; 2026 = 50.8; 2027 = 49.5.
  - Central Government Gross Debt (percent of GDP): 2019 = 47.1; 2020 = 72.2; 2021 = 64.1; 2022 = 61.1; 2023 = 59.5; 2024 = 57.8; 2025 = 56.2; 2026 = 54.6; 2027 = 53.1.
  - Net Debt (Central Government, percent of GDP): 2019 = 40.9; 2020 = 60.0; 2021 = 55.6; 2022 = 53.8; 2023 = 52.6; 2024 = 51.1; 2025 = 49.4; 2026 = 47.6; 2027 = 46.0.
  - Memorandum: Net Debt as defined under SFRL: 2019 = 45.1; 2020 = 69.7; 2021 = 61.9; 2022 = 59.1.

### External Sector Developments
- Current account and trade (Table 7):
  - Current account balance (percent of GDP): 2019 = -5.0; 2020 = 2.2; 2021 = -2.2; 2022 (proj) = -3.5; 2023 = -3.0; 2024–2027 = -2.8 to -2.5.
  - Exports, f.o.b. (percent of GDP): 2019 = 8.9; 2020 = 8.5; 2021 = 12.5; 2022 = 13.7; 2023 = 13.5.
  - Imports, f.o.b. (percent of GDP): 2019 = 22.9; 2020 = 16.6; 2021 = 21.0; 2022 = 24.8.
  - Merchandise trade excluding Colón Free Zone, net (percent of GDP): 2019 = -14.1; 2020 = -8.1; 2021 = -8.6; 2022 = -11.1.
- Services and Canal:
  - Services, net (percent of GDP): 2019 = 12.9; 2020 = 10.2; 2021 = 10.2; 2022 = 9.8.
  - Transportation, net (percent of GDP): 2019 = 7.6; 2020 = 7.9; 2021 = 6.7; 2022 = 6.1.
  - Canal contribution to transportation (percent of GDP): 2019 = 4.7; 2020 = 6.4; 2021 = 6.3; 2022 = 5.8.
- External debt and reserves:
  - External debt (total, percent of GDP): 2019 = 155.0; 2020 = 197.6; 2021 = 177.4; 2022 = 166.0; 2023 = 163.7.
  - Gross international reserves (Table 8, end of period, US$ mn): 2019 = 4,375; 2020 = 9,930; 2021 = 8,832; 2022 = 9,666; 2023 = 10,388.
  - Gross international reserves in months of imports of goods and services: 2019 = 3.0; 2020 = 4.8; 2021 = 3.3; 2022 = 3.4; 2023 = 3.4.

### Banking Sector Soundness
- Nonperforming loans and provisioning (Figure 4 and Table 6):
  - Nonperforming loans to total gross loans (end-of-period): 2019 = 3.3; 2020 = 2.0; 2021 = 2.3; 2022Q1 = 2.5.
  - Provisions to nonperforming loans: 2019 = 53.7; 2020 = 102.4; 2021 = 148.0; 2022Q1 = 157.1.
- Profitability and capital:
  - Return on assets (percent): 2019 = 1.6; 2020 = 0.7; 2021 = 1.0; 2022Q1 = 1.2.
  - Regulatory capital to risk-weighted assets (percent): 2019 = 15.2; 2020 = 15.7; 2021 = 15.8; 2022Q1 = 15.3.
  - Capital to assets (leverage ratio, percent): 2019 = 12.5; 2020 = 11.8; 2021 = 12.2; 2022Q1 = 11.9.
- Liquidity:
  - Liquid assets to total assets (percent): 2019 = 10.0; 2020 = 10.7; 2021 = 11.4; 2022Q1 = 14.7.
  - Liquid assets to short-term liabilities (percent): 2019 = 29.0; 2020 = 28.5; 2021 = 32.4; 2022Q1 = 42.2.
- System-level banking aggregates (Table 5, selected):
  - Private sector credit (US$ mn): 2019 = 54,901; 2020 = 53,465; 2021 = 54,281; 2022 (proj) = 56,619.
  - Total deposits (US$ mn): 2019 = 42,239; 2020 = 45,703; 2021 = 47,811; 2022 (proj) = 53,053.

### Capacity to Repay and Fund Relations
- Fund-related indicators (Table 9):
  - Existing and prospective drawings (100% of Quota): 2020 = 376.8; 2021 = 0.0; 2022 = 1,884.0.
  - Repurchases under the PLL: 2022 = 235.5; 2023 = 942.0; 2024 = 706.5.
  - Total charges (percent of quota): 2022 = 30.7; 2023 = 68.1; 2024 = 62.7; 2025 = 59.2; 2026 = 37.4; 2027 = 5.8.
  - Outstanding stock of Fund credit (Millions of SDRs): 2021 = 376.8; 2022 = 2,260.8; 2023 = 2,166.6; 2024 = 1,978.2; 2025 = 1,648.5; 2026 = 706.5; 2027 = 0.0.
  - Stock of Fund credit as percent of quota: 2022 = 600.0; 2023 = 575.0; 2024 = 525.0; 2025 = 437.5; 2026 = 187.5; 2027 = 0.0.
  - Stock of Fund credit (in percent of exports of G&S): 2022 = 10.2; 2023 = 8.8; 2024 = 7.7; 2025 = 6.0; 2026 = 2.4; 2027 = 0.0.
- Memorandum items:
  - GDP (US$ mn): 2021 = 63,605; 2022 (proj) = 70,579; 2023 = 76,620.
  - Exports of goods and services (US$ mn): 2021 = 27,115; 2022 = 30,240; 2023 = 33,755.
  - Gross International Reserves (US$ mn): 2021 = 9,539; 2022 = 10,090; 2023 = 10,791.

*Source: IMF staff; figures and tables as presented in the PDF chapter.*

### Annex I. General Assessment of Qualification Under the PLL

### Annex I. General Assessment of Qualification Under the PLL

### Overview and Key Findings
- Panama’s economic fundamentals and institutional policy frameworks remain sound. The authorities continue to implement, and have a track record of implementing, sound policies.
- Strong output recovery and macro indicators:
  - GDP grew by 15⅓ percent in 2021.
  - Real GDP expanded 13.6 percent (y/y) in the first quarter of 2022.
  - Contained inflation: 3.7 percent headline and 1.1 percent core.
  - NFPS deficit of 5.5 percent registered in 2021 (also reported as 5½ percent of GDP or US$3½ billion).
- Policy performance and sound policies:
  - Executive Board discussion of the 2021 Panama Article IV gave a generally positive assessment and welcomed authorities’ commitment to recalibrating policy responses, addressing FATF concerns, strengthening data adequacy, and preparing for post-pandemic recovery.
  - Fiscal balance improved significantly in 2021; further deficit reductions through 2025 expected via cyclical tax recovery, withdrawal of COVID-related spending, improved tax administration, and moderated expenditure growth.
  - Large tax expenditures (estimated at close to 4 percent of GDP) provide an important margin of maneuver.
  - Authorities applied risk-based supervision to the non-financial sector, used the practical guide for financial investigations, passed Law 254 on October 26, 2021, approved the Sectoral Risk Assessment, and compiled beneficial ownership information for companies incorporated by some of the largest law firms.
- FATF progress and concerns:
  - At the FATF plenary meeting in June 2022, the number of “largely addressed” action items increased from 8 to 11 (out of 15; compared with 5 at the time of the first review), but FATF repeated concern that Panama had not fully implemented its action plan.

### External Position and Market Access
- Panama performs strongly in the external position and market access.
- Criterion 1 — Sustainable external position:
  - 2020 external position assessed as moderately stronger than level implied by fundamentals and desirable policy settings (2021 EBA confirms assessment).
  - Current account deficit widened in 2021 and projected to widen further in 2022 due to pick-up in import volumes and higher oil prices; expected to improve steadily over the medium term with stronger export receipts from copper, Canal traffic, tourism, and re-exports from the free zone.
- Criterion 2 — Capital account dominated by private flows:
  - FDI accounted for 55 percent of the total private capital flows during 2018–21.
  - Deposits and other external liabilities in the banking sector accounted for about 50 percent of total external liabilities during 2018–21.
  - Private external debt accounted for more than 70 percent of total external debt as of end-2021.
  - NIIP projected to improve over the medium term due to higher net exports and continued private capital inflows.
- Criterion 3 — Track record of sovereign market access:
  - Sovereign global bond issuances in recent years amounted to 2,160 Panama’s quota, far exceeding the minimum threshold of 50 percent for the market access criterion.
  - Panama has placed bonds every year in the last decade, exceeding the minimum of placing sovereign bonds in 3 out of the last years.
  - Achieved investment grade status in 2010; EMBI spread stood at 235 bps as of May 25, 2022 (compared with emerging markets average 404 bps and region 454 bps).
- Criterion 4 — Comfortable reserve position (dollarized economy):
  - Fiscal liquidity reserve buffer: central government deposits at commercial banks are above the recommended benchmark of 1 month of expenditure.
    - Average coverage over 2011–21 is 2.4 months of central government expenditure.
    - Sovereign Wealth Fund of about 2.6 percent of GDP (in foreign assets abroad).
  - Banking sector liquidity reserve buffer:
    - Liquid assets ratio stood at 58.5 percent as of end-May 2022 (minimum statutory requirement of 30 percent).
    - Banks’ short-term external assets cover close to 100 percent of banks’ short-term external liabilities.

### Fiscal Policy
- Panama performs strongly in fiscal policy.
- Criterion 5 — Sound public finances and sustainable public debt:
  - Long tradition of fiscal discipline with fiscal rule legislation since 2008.
  - SFRL (by 2019) based on medium-term anchors: 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 adjustments: National Assembly approved relaxation of fiscal target for 2020 to 10½ percent of GDP, with a view to gradual adjustment and a new fiscal deficit anchor of 1½ percent of GDP in 2025.
  - NFPS debt reached 58.4 percent of GDP in 2021.
  - NFPS financial assets: 17½ percent of GDP in bank deposits by 2021 and 2 ¼ percent of GDP in holdings by the Sovereign Wealth Fund (FAP).
  - Net debt amounted to 41.1 percent of GDP in 2021.
  - Public debt peaked at 65.6 percent of GDP in 2020, declining thereafter to close to 49½ percent of GDP by 2027.
  - Primary surplus of about 0.6 percent of GDP expected under the fiscal rule for 2027.
  - Primary deficit of about 0.3 percent of GDP would be required to maintain the debt-to-GDP ratio constant under the Debt Sustainability Analysis.

### Monetary Policy
- Panama performs strongly in monetary policy.
- Criterion 6 — Low and stable inflation within sound monetary and exchange rate framework:
  - Fully dollarized economy without a central bank; monetary policy tracks the U.S. Federal Reserve.
  - Dollarization in place for over a century; no expectation of regime change.
  - Stable and low single-digit inflation of below 2 percent over the last 5 years.
  - Inflationary expectations remain well-anchored and around 2 percent over the medium term.

### Financial Sector Soundness and Supervision
- Panama does not substantially underperform in financial sector soundness and supervision; main underperformance risk stems from FATF grey listing.
- Criterion 7 — Sound financial system and absence of solvency problems:
  - Regulatory capital adequacy ratio: 15.3 percent as of end-March 2022 (15.8 percent as of end-2021); minimum requirement 8 percent.
  - Bank liquidity: 58.5 percent of short-term deposits as of end-May 2022; regulatory minimum 30 percent.
  - NPL ratio: 2.5 percent in March 2022 (2.3 percent at end-2021).
  - Share of modified (local) loans to total (local) loans declined to 11.9 percent as of end-March 2022 from 47.6 percent in July 2020.
  - Fund for Economic Stimulus (FES): US$500 million earmarked; only US$86.5 million drawn as of end-May 2022; no banks had used the liquidity facility under the FES as of end-May 2022.
  - Loan restructuring measures: moratorium on loan servicing ended June 30, 2021; restructuring window July–September 2021.
  - Rule 9, 2020 required a 3 percent ad hoc provision on gross modified loan portfolio.
  - Loan-loss provision-to-NPL ratio rose to 174 percent at end-2021 from 102 percent in 2019.
  - Financial integrity risks: prolonged FATF grey listing raises risks including possible loss of correspondent banking relationships; EU blacklisting for tax purposes adds reputational risk.
- Criterion 8 — Effective financial sector supervision:
  - Implementation of most main FSAP recommendations from 2011: RTGS introduction, stress tests, annual Financial Stability Report, residential housing price index.
  - FSAP Update scheduled for mid-2023.
  - SBP intensified prudential supervision: exhaustive review of banks’ loan portfolios; weekly monitoring of repayments and accrued interest on modified portfolios; inspection of expected loss models to guide provisioning.

### Data Adequacy
- Panama does not substantially underperform in data adequacy; data provided to the Fund has some shortcomings but is broadly adequate for surveillance.
- Criterion 9 — Data transparency and integrity:
  - All three statistical-related structural benchmarks have been met; the fiscal data resumption benchmark was met ahead of its end-March 2022 target.
  - Publication of the data template on International Reserves and Foreign Currency Liquidity and meeting the structural benchmark on fiscal data are important steps toward SDDS requirements.
  - Areas needing improvement for SDDS subscription: central government operations; production index (IMAE); producer price index; labor market.
  - Authorities are working to improve frequency and timeliness of central government operations data and the timeliness of the IMAE.

*Annex I. General Assessment of Qualification Under the PLL.*

### 2. Institutional strength. Panama is a dollarized economy with  no independent monetary

### 1panea2022001 - 2. Institutional strength. Panama is a dollarized economy with  no independent monetary

### Institutional context and financial sector resilience
- Panama is a dollarized economy with no independent monetary policy (and no Central Bank); institutional quality of economic policy is centered on fiscal policy and underpinned by the fiscal and social responsibility law which provides a strong fiscal anchor.
- As a large financial center, institutional strength relies on an effective prudential and modern regulatory framework following best international practices, allowing effective adjustment to shocks, including during the Global Financial Crisis and the COVID-19 pandemic.
- Banking practices are conservative; banks choose to operate with unusually large capital and liquidity buffers.

### Governance indicators (Worldwide Governance Indicators, WGI)
- WGI estimate ranges from -2.5 (weakest) to 2.5 (strongest), with zero corresponding to median governance performance.
- Panama performs similar to the Latin American and Caribbean (LAC) average in most dimensions.
- Selected point estimates for Panama (2020):
  - Voice and accountability: 0.6
  - Government effectiveness: 0.1
  - Regulatory quality: 0.3
  - Control of corruption: -0.5 (identified area needing improvement)
- Note: Use of these indicators should be considered carefully, as they are derived from perception-based data. Ranges are for a 90 percent confidence interval.

### Fiscal framework and public debt anchor
- The amended fiscal rule is projected to place public debt on a firmly declining path in the baseline scenario.
- Baseline public debt dynamics:
  - Peak public debt in 2020: 65½ percent of GDP
  - Projected public debt in 2027: 49¾ percent of GDP
  - Primary balance path: from a 8¼ percent of GDP deficit in 2020 to a 0.6 percent of GDP surplus in 2027
  - Positive differential between real GDP growth and real effective interest rate assumed
  - Gross financing needs: peak at 15.6 percent of GDP in 2020, shrinking to 4.0 percent of GDP in 2027 (below the 2010–18 average of 6½ percent of GDP)
  - External financing requirements and share of debt held by non-residents remain high over projection horizon; baseline assumes full access to international markets at a low spread on US debt

### Baseline projections and key statistics (selected from Figure AIII.1)
- Sovereign spreads (EMBIG, bp): 215
- Nominal gross public debt (percent of GDP): 2020: 65.6; 2021: 58.4; 2022: 56.0; 2023: 54.8; 2024: 53.4; 2025: 52.1; 2026: 50.8; 2027: 49.5
- Public gross financing needs (percent of GDP): 2020: 15.6; 2021: 13.4; 2022: 6.6; 2023: 5.7; 2024: 6.4; 2025: 4.2; 2026: 5.4; 2027: 4.0
- Net public debt (percent of GDP): 2020: 43.5; 2021: 41.1; 2022: 41.0; 2023: 40.8; 2024: 39.9; 2025: 38.7; 2026: 37.6; 2027: 36.6
- Real GDP growth (percent): 2020: -17.9; 2021: 15.3; 2022: 7.5; 2023–2027: 5.0 each year
- Inflation (GDP deflator, percent): 2020: -1.8; 2021: 2.2; 2022: 3.2; 2023: 3.4; 2024–2027: 2.5/2.0/2.0/2.0 (table shows sequencing)
- Effective interest rate (percent): 2020: 5.0; 2021: 4.4; 2022: 4.7; 2023–2027: 4.6/4.7/4.8/4.8/4.8 (table sequencing)
- Cumulative change in gross public sector debt (2020–2027): -8.9 (percent of GDP)
- Identified debt-creating flows cumulative (2020–2027): -6.6 (percent of GDP)
- Automatic debt dynamics cumulative contribution (2020–2027): -10.1 (percent of GDP)
- Real interest rate contribution cumulative (2020–2027): 6.3 (percent of GDP)
- Real GDP growth contribution cumulative (2020–2027): -16.4 (percent of GDP)
- External financing requirement: 76 percent in 2020 (noted as a relevant vulnerability; explained by considerable external liabilities—principally deposits—matched by sizeable liquid assets)

### Stress tests and alternative scenarios
- Growth and contingent-liability shocks can push debt above the 70 percent of GDP threshold, but debt declines thereafter in projected horizons.
- Specific stress outcomes:
  - One-standard deviation two-year growth shock: debt to GDP reaches 73 percent in 2024.
  - Crystallization of contingent liabilities from the financial sector—government bailouts to banks equal to 10 percent of outstanding credit to the private sector—would raise debt up to 82 percent in 2024 (Annex III, scenario 2).
  - In the adverse scenario (including PLL disbursement in 2022 and a more protracted pandemic impact):
    - Nominal GDP growth lower in 2022 by 3.5 percent (relative to baseline)
    - Interest rates on new debt issues rise by almost 1 point in 2022
    - Public deficit expands: 2022 baseline 4 percent of GDP → adverse 5.7 percent of GDP; 2023 baseline 3 percent of GDP → adverse 3.8 percent of GDP
    - Higher gross financing needs in adverse scenario: by US$1 billion in 2022 and US$0.2 billion in 2023
    - Refinancing difficulties reduce resort to external and domestic issuances by US$0.75 billion and US$1.5 billion in 2022 and 2023 respectively, with increased gross financing needs met by drawing down the PLL (US$1.3 billion by year) and additional asset withdrawals of US$0.4-0.5 billion each year
    - Under adverse scenario public debt still peaks in 2020 and declines to 52 percent of GDP in 2027
    - Under adverse scenario stress tests: GDP shock and financial contingent liabilities cause debt peaks at 76 and 85 percent of GDP respectively, then decline to 72 and 81 percent
    - Gross financing needs breach 15 percent of GDP only under the contingent liability shock, reaching 21 percent of GDP in 2023 (its year of occurrence) and falling to 8 percent of GDP by 2027

### Debt profile vulnerabilities and market indicators
- Main vulnerabilities:
  - High external financing requirements (76 percent in 2020)
  - High share of public debt held by non-residents (country-specific percentages highlighted in heat-map analysis)
- Market perception indicators (as of June 09, 2022): EMBIG (bp): 215; 5Y CDS (bp): 116 (values reported in figure table)
- Composition dynamics highlighted: concentration of net borrowing on medium- and long-term maturities (global bonds and multilateral debt)

### Data adequacy work plan (Annex IV — selected actions and leading agencies)
- PLL: Structural Benchmarks
  - Establish a National Statistical Coordination Committee — INEC
  - Publish the Data Template on International Reserves — INEC/SBP
  - Resume quarterly publication on the INEC website of the Fiscal Operations of CG and GG adding detailed financing data — MEF/INEC
- ROSC: Cross-cutting Recommendations (to be included in National Statistical Plan 2021–25)
  - Update National Statistical Plan — INEC
  - Re-Institute the National Statistical Council — INEC
  - Improve INEC Brand including structure of website and visibility of logos — INEC
  - Strengthening key macroeconomic programs: ensure sufficient budgetary, human, and information technology resources to INEC; human resources should maintain and expand expertise; consultation with users — INEC/MEF/SBP
  - Innovation, Research and Analysis: appoint a senior manager to promote innovation (e.g., Chief Innovation Officer) — INEC
- ROSC: Data category–specific recommendations (selected)
  - National Accounts: Update benchmark year to 2017/2018; develop plan to update national accounts benchmarks every five years — INEC
  - Consumer Price Indices: Allocate needed human resources and equipment to Price and Standard of Living Section and regional offices; hold regular meetings between collection staff — INEC
  - Government Finance Statistics: Fix the ISTMO system and restart data compilation and dissemination of central and general government operations, including financing data; source data provision using electronic workable files containing monthly details; compile preliminary GFS and PSDS reports — MEF/INEC
  - Monetary and Financial Statistics: Establish formal mechanism to elicit users’ needs; improve sectorization of the public sector per international methodology; implement plans to prepare and publish monetary and financial statistics according to international standards; publish an advance release calendar — INEC/SBP
  - Balance of Payments Statistics: Strengthen interinstitutional arrangements for source data sharing; foster training of BOPS staff; implement measures to limit size of revisions and improve measurement of capital flows; achieve coherent presentation using BPM6 — INEC

*Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.*

### Annex V. External Economic Stress Index

### Annex V. External Economic Stress Index

### Methodology
- The External Economic Stress Index (EESI) is an indicator of the evolution of external risks faced by Panama, focusing on risks associated with changes in external demand and global financing conditions.
- The index consists of four variables:
  - U.S. growth rate (proxy for risks to FDI inflows).
  - World exports (proxy for net exports in the current account).
  - Change in the 10-year U.S. Treasury yield (proxy for risks to the portfolio liabilities in the financial account).
  - Volatility index VIX (proxy for risks to other investments in the financial account).
- The EESI is calculated as a weighted sum of standardized deviations of the above variables from their means.
- The weights are estimated using balance of payments and international investment position data:
  - Weight on U.S. growth rate corresponds to net FDI inflows.
  - Weight on world growth corresponds to net exports of goods and services.
  - Weight on the VIX corresponds to the stock of other investment in the financial account.
  - Weight on the U.S. Treasury government bond corresponds to the sum of portfolio liabilities in the financial account.

### External risks, proxy variables, and weights
- External Demand — Net Exports: World GDP Growth — Weight: 0.31
- FDI: U.S. GDP growth — Weight: 0.18
- Global Financial Conditions — Portfolio Investment: Change in 10-year Treasury Yield — Weight: 0.11
- Other Investment: VIX — Weight: 0.40
- Sources: Haver and WEO.

### Scenarios
- Baseline:
  - Uses the “July 2022 WEO Update” projections for U.S. and world GDP growth.
  - VIX is assumed to remain around its current level.
  - 10-year U.S. Treasury yield is assumed to increase gradually.
- Adverse scenario:
  - Reflects a recession in the U.S. and global economy.
  - Combined with persistent financial market volatility.

### Overall assessment and historical context
- The EESI experienced a strong decline in the second quarter of 2020 due to the effects of the COVID crisis on U.S. and global growth and financial market conditions.
- The index followed by a steep increase in the third quarter of 2020 as lockdown restrictions eased and growth in advanced economies was boosted by economic stimulus.
- External pressures abated somewhat since the PLL approval in January 2021, supported by stronger-than-expected global growth, a strong U.S. recovery, and reduced uncertainty around vaccine development and deployment.
- The Russian invasion of Ukraine in early 2022 increased geopolitical tensions and led to disruptions in global recovery, with higher and more volatile food and energy prices.
- Growth prospects have declined in the US and monetary tightening to curb inflation is expected to accelerate.
- External pressures faced by Panama have increased but are expected to remain manageable and in line with historical averages under the baseline.
- Materialization of downside risks would lead to a moderately heightened stress index.
- Chart note: External Economic Stress Index: Historical and Projection (Higher values=decreasing stress). Baseline and Adverse projections are reported, with references to Baseline (PLL request) and Adverse scenario (PLL request).
- Data sources for historical series and projections: WEO, Haver, and IMF staff calculations.

*Source: Annex V. External Economic Stress Index, 1panea2022001.*

### 9.      Indicative  targets under the  PLL arrangement for end-September 2021 and end-March 2022

### 9. Indicative targets under the PLL arrangement for end-September 2021 and end-March 2022

### Compliance with PLL and program intent
- All indicative targets under the PLL arrangement for end-September 2021 and end-March 2022 were met.
- Authorities have complied with, and will continue to comply with, the standard performance criteria on trade and exchange restrictions, bilateral payment agreements, multiple exchange rate practices and non-accumulation of external debt arrears.
- The government will continue providing the IMF with all required information under the PLL arrangement and the Fund’s Articles of Agreement.
- Working groups with Fund staff to monitor policy advances under the PLL have held recurring meetings and will continue to meet regularly.

### Macroeconomic developments and outlook
- Monthly Index of Economic Activity (IMAE): 11.2 percent year-over-year in April.
- Projected real GDP growth: 7.5 percent for year end-2022.
- Unemployment rate: fell from 11.3 percent in October 2021 to 9.9 percent in April 2022.
- Inflation:
  - Headline inflation: 4.2 percent year-over-year in May 2022.
  - Accumulated since January: 3.3 percent.
  - Core inflation: 1.1 percent.
  - Staff expectation: headline inflation expected to hover around 4 percent by end-2022 and gradually return to historical average of 2 percent over the medium-term.
- COVID-19 vaccination and health outcomes:
  - Vaccination coverage: 88 percent of the target population with one-dose, and 79 percent with two doses.
  - Recent uptick in COVID-19 cases with a low number of deaths and hospitalizations.

### Fiscal policy and public finance
- Non-financial public sector deficit:
  - 2020: 10.5 percent of GDP.
  - 2021: 5.5 percent of GDP.
  - Projected 2022: 4 percent of GDP (consistent with the 2022 budget approved by the National Assembly).
- Fuel subsidy: recent temporary subsidy not expected to derail consolidation efforts.
- Public debt-to-GDP ratio projection:
  - Peak 2020: 65.6 percent.
  - Projected by 2027: 49.5 percent.
- Fiscal framework and reforms:
  - MEF implementing a comprehensive action plan to strengthen fiscal policy framework, revenue mobilization, and expenditure control.
  - Reform of the General Budget Law to upgrade budget framework, procedures, and practices, supported by IMF technical assistance.
- Authorities committed to compliance with the amended fiscal rule to support debt sustainability.

### Financial sector stability and indicators
- Private sector credit growth: 3.2 percent year-over-year in March 2022.
- Regulatory capital adequacy ratio: 15.3 percent (minimum threshold 8 percent).
- Liquidity buffers: official banks' liquidity buffers significantly higher than legal requirement; buffers almost double the regulatory minimum of 30 percent.
- Forbearance measures: loan restructuring process ended in September 2021.
  - Share of modified loans to total loans: from 47.6 percent in July 2020 to 11.9 percent by end-March 2022.
- Nonperforming loans (NPLs): 2.5 percent at end-March 2022, with a high loan-loss provision-to-NPL after stricter provisioning requirements.
- FSAP engagement:
  - A joint IMF-World Bank mission met June 29 to open dialogue; tentative schedule to complete FSAP during the first semester of 2023.
  - FSAP focus pillars:
    1. Risk analysis/stress testing, interconnectedness, growth at risk/capital flows at risk.
    2. Banking supervision around full Basel core principles assessment, macroprudential oversight, AML/CFT.
    3. Safety net & crisis management.
  - Assessment expected to feed into next year’s Article IV Consultation.

### Program performance, liquidity, and targets
- National Government deposits at the National Bank of Panama:
  - Actual at end-March 2022: US$4 billion.
  - Indicative target: US$1.0 billion.
- Official banks' ratio of liquid assets to net deposits:
  - Actual at end-March 2022: 82.2 percent.
  - Indicative target: 30 percent.
- Statement: All indicative targets were met with large margins; two of three structural benchmarks were timely met, with significant progress on the third related to AML/CFT measures.

### AML/CFT reforms, FATF progress, and beneficial ownership
- FATF action plan progress: 11 out of 15 recommendations experienced significant progress; remaining four showed encouraging advances.
- Beneficial Ownership Registry:
  - Prior action target: upload at least 18,000 companies.
  - Outcome: as of July 5, a total of 20,545 companies have uploaded their information in the Beneficial Ownership Registry.
  - Superintendency of Non-Financial Entities undertook identification and compilation of information maintained by law firms acting as resident agents.
- Oversight and enforcement:
  - Between 2019 and 2022, in situ oversight doubled relative to 2016-2020.
  - Extra situ oversight increased by almost ten-fold; in 2022 expected to double the number of extra situ scheduled oversight.
  - Sanctioning and investigations: 35 sanctions by oversight and regulatory bodies, and 15 new investigations started.
  - More than half of Panamanian corporations have been suspended for failure to provide required legal representation information or for not maintaining up-to-date payments.

### Data adequacy and statistical transparency
- Structural benchmarks met:
  - Publish the Data Template on International Reserves and Foreign Currency Liquidity on the National Summary Data Page (NSDP): Data template published on Panama's NSDP on September 30, 2021 by INEC; data was published on November 22, 2021.
  - Resume quarterly publication of Fiscal Operations of Central Government and General Government at INEC: benchmark met.
- SDDS subscription efforts: authorities intensified action plan to ensure subscription to SDDS standards by end-2022, focusing on coverage, periodicity, and timeliness—especially labor market and producer price index data and reducing lag in IMAE dissemination.

### Final policy commitments and outlook
- Authorities believe current policies are adequate to achieve PLL-supported program goals and commit to taking additional measures if necessary.
- Continued commitments:
  - Strengthen Panama’s economic recovery, financial integrity, fiscal discipline, and investment climate.
  - Continue implementing FATF action plan measures to exit the FATF grey list as soon as feasible.
  - Treat the PLL arrangement as precautionary while maintaining access to international financial markets.
- Expected outcomes by end of the arrangement:
  - Projected decline in gross financing needs and public debt.
  - Strengthened fiscal transparency and public financial management supporting investment-grade status.
  - Economy projected to grow beyond pre-pandemic GDP levels.

*Source: IMF staff and Panamanian authorities communication in the PLL arrangement documentation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1panea2022001.pdf_