## 1panea2023002 - 2022. Inflation is low compared with other countries, in part the result of temporary ## Source details **Canonical URL:** [1panea2023002 - 2022. Inflation is low compared with other countries, in part the result of temporary](https://www.imf.org/-/media/files/publications/cr/2023/english/1panea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1panea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1panea2023002.pdf.json) --- ### Background and IMF Support - The Fund provided support to Panama following the outbreak of the pandemic, including the Rapid Financing Instrument (RFI), a two-year Precautionary and Liquidity Line (PLL) arrangement, and a SDR allocation. - Total Fund support since the beginning of the pandemic amounted to over 6¼ percent of GDP. - A two-year PLL arrangement for 500 percent of quota, equivalent to US$2.7 billion (SDR 1.884 billion), was approved on January 19, 2021. - Financing and disbursements (as presented): - RFI disbursement: 377 (US$) on 15-Apr-20 (Disbursed). - PLL: 1,884 (US$) on 19-Jan-21 (Precautionary). - SDR Allocation: 361 (US$) on 23-Aug-21 (Allocation, Unused). - Total: 2,622 (US$) and 695.8 (percent of GDP) shown in summary table. ### Strong Recovery Post-Pandemic but Large Scarring - Pre-pandemic dynamics and construction boom: - Real GDP grew by 6 percent annually over the pre-pandemic decade-and-a-half. - Construction as a share of GDP (domestic value added) peaked at 20.0 percent in 2018. - Investment in construction amounted to 32.4 percent of GDP in 2018: 10.3 percentage points residential building; 12.1 other buildings; 10.7 other constructions and works. - COVID-19 impact and recovery: - GDP declined by 18 percent in 2020. - Unemployment rose to 18½ percent in 2020, from 7 percent in 2019. - Construction was shut down for six months, contributing to a 50 percent decline in investment. - Panama’s COVID-19 death toll: 1,900 per million. - Real GDP grew by 15⅓ percent in 2021 and a projected 9 percent in 2022. - GDP in 2022 is still 13 percent below the level projected before the pandemic. - Lower potential GDP growth driven by sharp decline in investment and lower growth of the capital stock. ### Inflation, Subsidies, and Social Unrest - Inflation dynamics: - Inflation rose from -2 percent in October 2020 to 5.2 percent in June 2022. - Headline inflation stood at 2.1 percent in December (context implies December 2022). - Government measures in response to protests: - Fuel subsidies set at $3.25 per gallon, initially for a period of 3 months, later extended to January 2023. - Extension of targeted pandemic-era subsidies. - Key assessment: - The report notes that low inflation compared with other countries is in part the result of temporary subsidies on fuel and food. ### Fiscal Developments and Medium-Term Path - NFPS deficit trajectory: - 2020: 10½ percent of GDP. - 2021: 6.7 percent of GDP (below the 7-7½ percent limit established by the fiscal rule). - 2022: 4 percent of GDP. - Excluding a cash-flow swap operation that shifted 0.5 percentage point in interest payments to later years, the deficit would have been about 4½ percent of GDP. - Fiscal rule (SFRL) path prescribed: - Reduce NFPS deficit from 10½ percent of GDP in 2020, to 7-7½ percent of GDP in 2021, to 4 percent of GDP in 2022, converging to 1.5 percent of GDP in the medium term. - 2023 fiscal stance and measures: - Authorities’ 2023 NFPS deficit target of 3 percent of GDP (the ceiling set by the SRFL) is appropriate. - Staff expects authorities to meet their 2023 deficit target, underpinned by: - Expiration of large covid-19 and cost-of-living subsidies. - Elimination of the ITBMS (VAT) exemption on digital platform purchases. - Adoption of tax administration measures: electronic invoicing, Large Taxpayers Unit (LTU) scrutiny, and new scanners at customs checkpoints. - Selected 2023 fiscal measures (In percent of GDP): - Expenditure measures total 1.3: End of COVID-19 related measures 0.9; Expiration of fuel subsidies 0.2; Restraint in wages, goods and services 0.2. - Tax revenue measures total 0.6: Expansion of electronic invoicing 0.1; Revenues from LTU introduction 0.1; Other DGI modernization plans 0.1; Digital platform purchase taxation 0.3. - Government plans to further reduce the deficit to 2 percent of GDP in 2024 and 1½ percent of GDP in 2025 and beyond. ### Banking Sector and Financial Stability - Sector size and capitalization: - Total number of institutions: 141. - Total Assets: 148.2 (US$ billion) = 233 percent of GDP. - Banks’ exposure to the government amounts to 9 percent of total assets. - Mortgage and construction loans currently comprise 42.7 percent of total lending. - Aggregate capital and liquidity buffers are well above regulatory minima: Capital adequacy ratio was 15 percent at end-September (minimum requirement 8 percent); Liquidity buffers at end-2022 covered 57 percent of short-term deposits (regulatory requirement 30 percent). - Pandemic-related borrower relief and provisioning: - Temporary moratorium on loan service March 2020–June 2021; modified loans were not classified as NPL during moratorium. - Share of modified loans: 38.8 percent of total loans in April 2020; peaked at 47.6 percent in July 2020; declined to 16.8 percent at end-2021; 11.9 percent at end-Q1 2022. - Loan-loss provisions stood at 144 percent of NPLs at end-September 2022. - From January 2023, all remaining modified loans were reclassified according to the pre-pandemic regulation. - Interest rate and external debt exposure: - Panama’s 10-year government bond yield has risen by 244 bps since the beginning of 2022, compared with 190 bps in the US. - Short-term external debt of nonfinancial corporations amounts to 8 percent of GDP. - The average bank deposit rate increased 40 bps while the lending rate only rose 5 bps (compared to the 400 bps increase in the Fed Funds rate). - External wholesale deposits account for 7 percent of total deposits in the banking system. - Every 100 bps higher interest rates add 0.2 percent of GDP to annual interest costs by 2027; the increase in long-term yields reported will add about 0.4 percent of GDP to government annual interest costs by 2027. - Financial sector supervision and recommended reforms: - Reclassification of modified loans and correct loan-loss provisioning prioritized. - Institute liquidity stress tests (with IMF TA). - Expand macroprudential toolkit: borrower-based measures (caps on loan-to-value and debt-service-to-income ratios). - Implement Basel III capital conservation buffer and surcharge for systemically important banks. - Require recovery plans for all banks; SBP to develop resolution plans for systemic banks. - Develop a deposit insurance scheme and an official lender of last resort function in the medium term; maintain the emergency liquidity window of the FES until reforms are implemented. - Crisis-management facilities: - The FES is a $1 billion financial stability fund comprising an emergency liquidity window to support banks ($500 million) and a credit facility to stimulate the economy; it is owned by the MEF and operated by BNP. ### External Sector, Reserves, and External Financing - Current account developments: - 2020: sharp drop in imports narrowed the current account deficit temporarily. - 2021: current account deficit widened to 3¼ percent of GDP. - 2022: estimated current account deficit of 4 percent of GDP. - Current account norm (EBA-lite): -2.7 percent of GDP. - External financing and buffers: - Strong capital inflows from foreign direct investment and portfolio inflows support the deficit and reinforce external buffers. - Gross international reserves (selected sequence): 3,149; 4,375; 9,930; 8,832; 9,752; 10,379; 10,958 (millions US$, 2018–2024). - Reserves in months of imports of goods and services: 1.4; 3.0; 4.9; 3.5; 3.6; 3.6; 3.5 (2018–2024). - External debt (baseline path, percent of GDP): 2017: 149.6; 2018: 153.0; 2019: 155.0; 2020: 209.4; 2021: 188.3; 2022: 169.4; 2023: 168.1; 2024: 167.0; 2025: 166.5; 2026: 166.0; 2027: 164.3; 2028: 162.5. - External debt stress scenarios noted (examples): - Growth shock terminal debt 205 vs baseline 164; combined shock terminal debt 189 vs baseline 164 (as presented). ### Growth Outlook and Risks - Growth projections: - 2022: 9.0 percent (presented). - 2023: 5 percent. - Medium-term: 4 percent. - Inflation projections: - 2.1 percent (y/y) at end-2022; projected to edge up to 3.1 percent (y/y) by end-2023; projected to gradually decline to 2 percent (y/y) over the medium term. - Current account and credit outlook: - Current account deficit projected to narrow from about 4 percent of GDP in 2022 to 2½ percent of GDP in the medium term. - Private sector credit likely to grow in line with nominal GDP. - Key downside risks: - Sharper-than-expected slowdown of the global economy. - Renewed increases in global food and energy prices. - Rising global interest rates and dislocations in global capital markets could pressure rollover of external corporate and sovereign debts. - Panama’s continued presence on the FATF grey list and on the EU list of non-cooperative jurisdictions for tax purposes could affect correspondent banking relationships and overseas credit channels. - Financial stability risks from weak economy → higher unemployment → deterioration in real estate prices → higher defaults. - Security and climate risks: cyberattacks; more frequent and severe climate-related natural disasters affecting Canal activity, agriculture, and tourism. - Disruptions in copper production (Cobre Panamá) related to ongoing negotiations with Minera Panama. ### Revenue Structure, Social Security, and Fiscal Reform Options - Revenue weaknesses: - Tax revenues are low because tax rates are low (especially for the ITBMS), many exemptions exist, tax expenditures are high and tax collection efficiency is weak. - Low tax revenues are partly compensated by non-tax revenues (mainly contributions from the Panama Canal Authority) but total general government revenue is low as well. - Staff reform options (government prefers not to raise main tax rates): - Review ITBMS tax exemptions and streamline refund processes. - Review exemptions and deductions from the PIT base. - Review tax incentives for CIT. - Consider raising cigarette and fuel excises to reflect externalities. - Adopt a minimum corporate income tax for companies that pay taxes in the countries where they are headquartered. - Social security (CSS) pension deficit: - Two pension systems within CSS: defined benefit plan (closed to new participants in 2008) and a newer, mixed system. - Deficit of the defined benefit plan about 1.1 percent of GDP in 2022; overall CSS deficit about 0.7 percent of GDP. - Reserves will run out in late 2024 or early 2025 (on a cash-flow basis). - Government awaiting “social dialogue” scheduled in early 2023; options include parametric reforms and new funding sources. ### FATF, AML/CFT, and Financial Integrity - FATF status and action plan: - Panama has been on the FATF grey list since June 2019. - By October 2022, authorities had “largely addressed” 12 out of 15 action items, while “partly addressing” the remaining 3. - FATF urged Panama to demonstrate significant progress by February 2023 or risk adverse action. - UBO registry and supervisory capacity: - As of February 8, 2023, the UBO registry contained UBO information on 78,637 companies, or close to 33 percent of total active firms. - SSNF budget rose to US$10.7 million in 2023 from US$2.4 million in 2019; staffing rose from one in April 2022 to six in December 2022 (projected 13 in 2023). - Supervision activity increases: onsite supervisions up 96 percent; offsite activities up 1571 percent (as of November 2022 vs 2021). - Gaps and policy recommendations: - Fintech and VASP regulatory gaps: 10 Fintech companies authorized by MICI as of December 2022 are not subject to AML/CFT preventive measures at licensing or supervision by MICI or SBP. - Authorities’ view: VASPs should be designated as reporting entities subject to preventive measures and a competent supervisory authority should be designated; AML/CFT Law needs amendment. - Staff recommendation: intensify measures to address remaining items in the FATF action plan to secure an exit from the FATF’s grey list. ### Climate, Mining (Cobre Panamá), and Structural Priorities - Mining (Cobre Panamá) scale and risks: - Total investment to date: "at least 10 billion dollars." - Estimated annual production: "400,000 tons of copper, 150,000 oz of gold, and 3,500 tons of molybdenum each year for at least the coming 10 years" with mine life >30 years. - INDESA estimates Minera Panamá's direct contribution to GDP about 3.2 percent and indirect contribution another 1.6 percent. - Copper exports accounted for "4.4 percent of GDP in 2021." - Negotiations over fiscal regime (January 2022 proposal) sought corporate income taxes at 25 percent, royalties "12-16 percent of the operating margin," and a yearly minimum payment ensuring combined payments "always greater than or equal to US$375 million." - Estimated impact of a one-quarter suspension: reduce annual GDP growth by 0.8 percentage point. - Climate policy options (selected): - Authorities allocated "US$100 million in 2020" for Hurricane Eta and Iota; committed US$100 million Cat-DDO from the World Bank. - Water losses: "estimated to lose more than 40 percent of the transported water due to widespread leakages." - Carbon tax scenario: introduction in 2024 bringing carbon price to "50 real US$ per ton of CO2 equivalent by 2030" could raise "between 0.1 and 0.6 percent of GDP in government revenues each year" and reduce emissions "by up to 5 million tons in CO2 equivalent"; could raise net welfare "by 0.6 percent of GDP by the end of the same period." ### Statistics, Data Adequacy, and Planned Improvements - Data timeliness and gaps: - Data is "broadly adequate for surveillance albeit with some shortcomings, particularly on timeliness." - Example: "2022Q2 BOP data was only published in January 2023." - Panama can currently only publish the IMAE with a timeliness of "55 days," while the SDDS requires "6 weeks." - Data gaps: inadequate data on commercial real estate prices, loan write-offs, loan-to-value ratios, and leverage indicators; no mechanism to monitor debtor’s income and value of acquired property after loan origination. - Ongoing statistical projects and TA: - Seasonal adjustment methodology for the monthly IMAE indicator supported by IMF TA. - National Statistical Plan (NSP) "2021-25" to foster statistical development and advance toward SDDS subscription. - 2023 Census of Population and Dwelling planned January–March 2023. - IMF/STA and FAD TA on GFS, PSDS, public accounting, and IPSAS implementation. - Key data timeliness indicators (selected): - CPI: Latest observation 12/2022; Date received 01/2023; Frequency M/M/M. - External Current Account Balance: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. - GDP/GNP: Latest observation 9/2022; Date received 12/2022; Frequency Q/Q/Q. - Gross External Debt: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. ### Policy Recommendations (summary) - Rebuild fiscal buffers and adhere to SFRL targets: NFPS deficit targets of 3 percent of GDP in 2023; 2 percent in 2024; 1½ percent in 2025. - Reverse decline in revenue-to-GDP ratio: broaden tax base, reduce exemptions, improve tax and customs administration, expand electronic invoicing, strengthen LTU scrutiny. - Strengthen financial integrity: complete FATF action plan and AML/CFT reforms to restore correspondent banking confidence. - Enhance financial sector resilience: maintain high capital and liquidity buffers; implement macroprudential tools (LTV and DTI caps); conduct liquidity stress tests; implement Basel III buffers and recovery/resolution planning; develop deposit insurance and lender-of-last-resort functions in the medium term. - Sustain convergence: invest in human capital and governance; increase education spending; diversify away from construction by boosting other productive and export sectors. - Improve statistics: implement the national statistical plan to improve the quality and timeliness of key macroeconomic data. *Source: 1panea2023002 - 2022. Inflation is low compared with other countries, in part the result of temporary (PDF).* ### 2022. Inflation is low compared with other countries, in part the result of temporary ### 1panea2023002 - 2022. Inflation is low compared with other countries, in part the result of temporary ### Background and IMF Support - The Fund provided support to Panama following the outbreak of the pandemic, including the Rapid Financing Instrument (RFI), a two-year Precautionary and Liquidity Line (PLL) arrangement, and a SDR allocation. - Total Fund support since the beginning of the pandemic amounted to over 6¼ percent of GDP. - A two-year PLL arrangement for 500 percent of quota, equivalent to US$2.7 billion (SDR 1.884 billion), was approved on January 19, 2021. - RFI disbursement: 377 (US$) on 15-Apr-20 (Disbursed). - PLL: 1,884 (US$) on 19-Jan-21 (Precautionary). - SDR Allocation: 361 (US$) on 23-Aug-21 (Allocation, Unused). - Total: 2,622 (US$) and 695.8 (percent of GDP) shown in summary table. ### Strong Recovery Post-Pandemic but Large Scarring - Pre-pandemic decade-and-a-half: rapid expansion in construction and investment; real GDP grew by 6 percent annually; TFP levels declined while factor inputs grew rapidly. - Construction boom indicators: - Construction as a share of GDP (domestic value added) peaked at 20.0 percent in 2018. - Investment in construction amounted to 32.4 percent of GDP in 2018: 10.3 percentage points residential building; 12.1 other buildings; 10.7 other constructions and works. - Major infrastructure and construction projects listed with phases and dates (Tocumen Airport expansions, Panama Canal Expansion 2007-16, Cobre Panama copper mine 2013-19, Panama City metro phases, Cinta Costera, numerous skyscrapers). - 2018–2019: The boom started to slow; economy grew by 3 percent in 2019 as major projects completed. - COVID-19 impact: - GDP declined by 18 percent in 2020. - Unemployment rose to 18½ percent in 2020, from 7 percent in 2019. - Construction was shut down for six months, contributing to a 50 percent decline in investment. - Panama’s COVID-19 death toll: 1,900 per million (noted as higher than region but below US, Europe, South America). - Recovery: - Real GDP grew by 15⅓ percent in 2021 and a projected 9 percent in 2022. - GDP in 2022 is still 13 percent below the level projected before the pandemic. - Lower potential GDP growth driven by sharp decline in investment and lower growth of the capital stock. ### Inflation, Subsidies, and Social Unrest - Inflation dynamics: - Inflation rose from -2 percent in October 2020 to 5.2 percent in June 2022. - Headline inflation stood at 2.1 percent in December (year not explicitly restated; context implies December 2022). - Government measures in response to protests over rising food and fuel prices: - Fuel subsidies set at $3.25 per gallon, initially for a period of 3 months, later extended to January 2023. - Extension of targeted pandemic-era subsidies. - The report notes that low inflation compared with other countries is in part the result of temporary subsidies on fuel and food. ### Fiscal Developments - NFPS (Non-Financial Public Sector) deficit trajectory: - 2020: 10½ percent of GDP. - 2021: 6.7 percent of GDP (below the 7-7½ percent limit established by the fiscal rule). - 2022: 4 percent of GDP. - Factors affecting the 2022 deficit: - Revenue rebound and contributions from the Panama Canal Authority (ACP). - Fiscal cost of food and fuel subsidies and extended pandemic-era subsidies offset by cuts in wage bill and goods and services. - Excluding a cash-flow swap operation that shifted 0.5 percentage point in interest payments to later years, the deficit would have been about 4½ percent of GDP. - Fiscal rule (SFRL) path prescribed: - Reduce NFPS deficit from 10½ percent of GDP in 2020, to 7-7½ percent of GDP in 2021, to 4 percent of GDP in 2022, converging to 1.5 percent of GDP in the medium term. ### External Sector and Current Account - Current account developments: - 2020: sharp drop in imports narrowed the current account deficit temporarily. - 2021: current account deficit widened to 3¼ percent of GDP. - 2022: estimated current account deficit of 4 percent of GDP. - Strong capital inflows from foreign direct investment and portfolio inflows support the deficit and reinforce external buffers. - External position assessed as broadly consistent with fundamentals and desirable policy settings (EBA-lite model shows a current account norm of -2.7 percent of GDP). ### Banking Sector - Central government gross debt is estimated at 60 percent of GDP at end-2022. - Banks are, on average, well capitalized and liquid. - Banking sector role and composition: - Panama’s large banking sector provided substantial construction and mortgage lending during the boom. - Mortgage and construction loans currently comprise 42.7 percent of total lending. - Domestic banks (general license, local and foreign ownerships) dominate; business model focused on credit and financial services with insignificant exposures to derivatives. - International banks are usually subsidiaries of large regional and global banking groups. - Charts and indicators referenced (bank loans, deposits, total local and foreign deposits, deposits by ownership) support assessments of scale and resilience. ### Outlook and Risks - Growth projections: - Economic growth expected to slow to 5 percent in 2023 and 4 percent in the medium term. - Fiscal outlook: - Expiration of Covid-19 and cost-of-living subsidies, and adoption of new revenue measures will further reduce the deficit to 3 percent in 2023, in line with the social and fiscal responsibility law. - Key risks: - Sharper-than-expected slowdown of the global economy. - Renewed increases in global food and energy prices. - Rising global interest rates and dislocations in global capital markets could pressure rollover of external corporate and sovereign debts. - Panama’s continued presence on the FATF grey list and on the EU list of non-cooperative jurisdictions for tax purposes could potentially affect correspondent banking relationships and key overseas credit channels. ### Policy Recommendations - Main policy focus: - Boost resilience to shocks by rebuilding fiscal buffers, strengthening financial integrity, and enhancing financial sector oversight. - Sustain rapid convergence with advanced economies. - Fiscal policy: - Reverse the steady decline in the revenue-to-GDP ratio to reduce the fiscal deficit over the medium term while creating room for new spending (including on education) and preserving social assistance. - Financial integrity and FATF: - Intensify measures to address remaining items in the FATF action plan to secure an exit from the FATF’s grey list. - Financial sector resilience: - Ensure banks remain well capitalized and liquid to preserve Panama’s role as a regional financial center. - Convergence drivers: - Strengthen human capital and governance to sustain convergence. - Statistics: - Implement the national statistical plan to improve the quality and timeliness of key macroeconomic data. *Source: 1panea2023002 - 2022. Inflation is low compared with other countries, in part the result of temporary (PDF).* ### 12. The impact of the pandemic on banks’ ### 12. The impact of the pandemic on banks’ ### Asset quality and moratorium effects - From March 2020 to June 2021 a temporary moratorium on loan service was in place to support borrowers who had difficulty servicing their loans (Annex V). Loans that were modified under the moratorium were not classified as NPL. - Since the end of the moratorium, the share of modified loans has declined sharply, but the share of NPLs has increased only modestly. - From January 2023, all remaining modified loans were reclassified according to the pre-pandemic regulation. - Loan-loss provisions stood at 144 percent of NPLs at end-September 2022. ### Interest rates, external debt, and banking rates - As a result of US monetary tightening, long-term interest rates have increased sharply. - Panama’s 10-year government bond yield has risen by 244 bps since the beginning of 2022, compared with 190 bps in the US. - Further increases in US interest rates, or increases in global risk aversion, could put pressures on short-term external debt of nonfinancial corporations, which amounts to 8 percent of GDP. - The increase in local bank rates has so far been modest: - The average bank deposit rate increased 40 bps while the lending rate only rose 5 bps (compared to the 400 bps increase in the Fed Funds rate). - External wholesale deposits only account for 7 percent of total deposits in the banking system. - Every 100 bps higher interest rates add 0.2 percent of GDP to annual interest costs by 2027. - The increase in long-term yields reported will add about 0.4 percent of GDP to government annual interest costs by 2027. ### Banking sector structure and exposures (Structure of Financial System, 2021) - Total number of institutions: 141 - Total Assets: 148.2 (US$ billion) = 233 percent of GDP - Commercial Banks: Number of Institutions 67; Total Assets 133.3 (US$ billion); Share of total assets 1090.0 percent of GDP? (Note: preserve numbers as presented) - Domestic Banks 1/: Number 42; Total Assets 117.5; Share 18579.3 (percent) — with Domestically-owned: 15 banks, 59.0, 9339.8; Foreign-owned: 27 banks, 58.6, 9239.5 - International banks 2/: Number 25; Total Assets 15.8; Share 2510.7 - Non-bank Financial Intermediaries: Number 135; Total Assets 114.9; Share 2310.0 - Insurance and Reinsurance: Number 54; Total Assets 3.7; Share 62.5 - Securities companies and pension funds: Number 17; Total Assets 95.0; Share 83.4 - Cooperatives: Number 53; Total Assets 62.4; Share 41.6 - Other financial entities: Number 58; Total Assets 23.8; Share 62.6 - Banks’ exposure to the government amounts to 9 percent of total assets. - Banks’ exposure to the real estate sector is high: - Average loan-to-value rate of new loans has been high (over 80 percent). - A fall in house prices or a decline in economic activity could lead to an increase in NPLs on mortgages and a decline in capital. - Foreclosure could lead to losses; borrowers facing difficulty servicing mortgages could stop servicing personal consumption loans. - External wholesale deposits account for 7 percent of total deposits in the banking system. ### Credit, deposits, and property indicators - Private credit growth is recovering: - Private credit grew 6 percent (y/y) in November 2022, up from -3 percent in March 2021. - Deposit growth was very strong during the pandemic but has since decelerated. - Panama City: Residential Property Price-to-Income Ratio (Numbeo methodology cited). - Mortgage Loan to Value (In Percent) history shows high LTVs; “over 80 percent” for new loans is noted. - Bank lending by sectors (percent): - Mortgage 33.9 - Personal consumption 22.8 - Trade 20.3 - Industry 5.6 - Construction 8.8 - Financial and insurance 2.6 - Public sector 2.3 - Others listed in the original sector breakdown. ### FATF grey list and financial integrity - Panama remains on the FATF grey list. - Since October 2021, the FATF has expressed significant concern that Panama failed to complete its action plan, the deadlines for which expired in January 2021. - The FATF strongly urged Panama in October 2022 to swiftly complete its action plan by February 2023 or the FATF will consider calling on its members and urging all jurisdictions to apply enhanced due diligence to business relations and transactions with Panama. - Insufficient progress on AML/CFT and on removal from the EU list of non-cooperative jurisdictions for tax purposes could affect correspondent banking relationships and key overseas credit channels, threatening financial stability and potentially causing an exodus of foreigners from the local real estate market. ### Outlook and risks (selected projections and risks) - Growth and inflation projections: - GDP growth is likely to slow to 5 percent in 2023. - Medium-term output is expected to grow in line with estimated potential growth rate of 4 percent. - Unemployment rate projected to fall to 8 percent by end-2023 (Staff’s current estimate of the NAIRU). - Inflation: 2.1 percent (y/y) at end-2022; projected to edge up to 3.1 percent (y/y) by end-2023; projected to gradually decline to 2 percent (y/y) over the medium term. - Current account and credit: - Current account deficit projected to narrow from about 4 percent of GDP in 2022 to 2½ percent of GDP in the medium term. - Private sector credit likely to grow in line with nominal GDP. - NPLs likely to remain low as modified loans decrease with continued restructuring and more write-offs. - Capital adequacy and liquidity ratios are expected to remain well above regulatory requirements. - Balance of risks tilted to the downside. Specific risk categories: - External risks: sharper global slowdown; further intensification of global tensions; spikes in sovereign yields; renewed increases in global food and energy prices. - Listings: lack of progress on AML/CFT and EU listing could disrupt correspondent banking, overseas credit, and real estate demand. - Financial stability risks: weak economy → higher unemployment → deterioration in real estate prices → higher defaults; large deposit withdrawals could affect liquidity, especially at banks with lower liquidity buffers; dislocations in global capital markets could pressure rollover of external corporate and sovereign debt. - Security and climate risks: cyberattacks; more frequent and severe climate-related natural disasters affecting Canal activity, agriculture, and tourism. - Disruptions in copper production: negotiations between the government and Minera Panama about a new contract are ongoing; risk of disruptions affecting growth, BOP and fiscal revenues. ### Fiscal stance, targets, and measures - Fiscal stance in 2023 is expected to be mildly contractionary. - Structural primary fiscal deficit projected to contract by 0.3 percentage points of GDP in 2023. - Authorities’ 2023 NFPS deficit target of 3 percent of GDP (the ceiling set by the SRFL) is appropriate. - Staff expects authorities to meet their 2023 deficit target, underpinned by: - Expiration of large covid-19 and cost-of-living subsidies. - Elimination of the ITBMS (VAT) exemption on digital platform purchases. - Adoption of several tax administration measures, including electronic invoicing, Large Taxpayers Unit (LTU) scrutiny, and new scanners at customs checkpoints. - Part of resulting fiscal space will be used for an increase in capital expenditure and to increase education spending to meet legally-mandated targets. - Government plans to further reduce the deficit to: - 2 percent of GDP in 2024 - 1½ percent of GDP in 2025 and beyond, in line with the SFRL. - In staff’s baseline outlook (assuming no new tax initiatives beyond 2023), the deficit target would be met by a reduction in the expenditure-to-GDP ratio, which could require reduction of the public investment-to-GDP ratio. - 2023 Selected Fiscal Measures (In percent of GDP) — aggregated categories and items: - Expenditure measures total 1.3 - End of COVID-19 related measures 0.9 - Expiration of fuel subsidies 0.2 - Restraint in wages, goods and services 0.2 - Tax revenues measures total 0.6 - Expansion of electronic invoicing 0.1 - Revenues from LTU introduction 0.1 - Other DGI modernization plans 0.1 - Digital platform purchase taxation 0.3 ### Medium-term macroeconomic projections (selected table entries, in percent) - Real GDP growth: 2018 3.7; 2019 3.0; 2020 -17.9; 2021 15.3; 2022 9.0; 2023 5.0; 2024 4.0; 2025 4.0; 2026 4.0; 2027 4.0; 2028 4.0 - Unemployment rate: 2018 6.0; 2019 7.1; 2020 18.5; 2021 11.3; 2022 8.8; 2023 8.0; 2024 8.0; 2025 8.0; 2026 8.0; 2027 8.0; 2028 8.0 - CPI inflation (average): 2018 0.8; 2019 -0.4; 2020 -1.6; 2021 1.6; 2022 2.9; 2023 2.2; 2024 2.2; 2025 2.0; 2026 2.0; 2027 2.0; 2028 2.0 - Private credit growth: 2018 4.5; 2019 2.4; 2020 -2.6; 2021 1.5; 2022 5.4; 2023 5.6; 2024 6.1; 2025 6.1; 2026 6.1; 2027 6.1; 2028 6.1 - Overall balance (NFPS, percent of GDP): 2018 -3.2; 2019 -3.4; 2020 -10.4; 2021 -6.7; 2022 -4.0; 2023 -3.0; 2024 -2.0; 2025 -1.5; 2026 -1.5; 2027 -1.5; 2028 -1.5 - Structural primary balance (percent of GDP): 2018 -2.3; 2019 -2.1; 2020 -4.3; 2021 -3.4; 2022 -2.1; 2023 -0.9; 2024 0.3; 2025 0.9; 2026 0.7; 2027 0.6; 2028 0.5 - Public debt (gross, percent of GDP): 2018 37.3; 2019 41.9; 2020 65.6; 2021 58.4; 2022 55.4; 2023 54.9; 2024 54.1; 2025 53.2; 2026 52.4; 2027 51.5; 2028 50.8 - Current account balance (percent of GDP): 2018 -7.6; 2019 -5.0; 2020 -0.4; 2021 -3.2; 2022 -3.9; 2023 -4.0; 2024 -3.5; 2025 -3.0; 2026 -2.8; 2027 -2.7; 2028 -2.5 ### Policy implications and recommendations (summarized) - Policies should focus on boosting resilience to shocks and sustaining convergence with advanced economies by: - Rebuilding fiscal buffers: adhere to SRFL targets and reduce deficits as planned (3 percent of GDP in 2023; 2 percent in 2024; 1½ percent in 2025). - Strengthening financial integrity: complete FATF action plan and AML/CFT reforms to restore correspondent banking confidence. - Enhancing financial sector policies to maintain capital adequacy and liquidity well above regulatory requirements. - Increasing tax revenue to sustainably reduce the fiscal deficit while preserving space for education, social spending, and investment (staff recommend increasing tax revenue; Panama’s central government tax-to-GDP ratio noted as low). - Investing in human capital and governance to sustain convergence given an expected decline in construction’s growth contribution. _Italic: Source — 1panea2023002 - 12. The impact of the pandemic on banks’ (IMF staff content provided in the supplied PDF excerpt)._ ### 5.77 percent of 2022 GDP from 5.4 percent of 2021 GDP. ### 1panea2023002 - 5.77 percent of 2022 GDP from 5.4 percent of 2021 GDP. ### Baseline fiscal outlook and assumptions - The baseline assumes that tax revenue will increase by 0.8 percentage point of GDP between 2023 and 2028 because of existing tax administration initiatives (including the establishment of LTU) and a cyclical rebound in revenues from the pandemic. - The baseline assumes the central government spending-to-GDP ratio reverts to pre-pandemic levels through restraint in the growth of the public wage bill and public consumption. - Central government transfers to the CSS gradually increase over time to fully cover the deficit in the defined-benefit component of the pension system (note that this does not affect the deficit of the non-financial public sector). - The government does not publish medium-term revenue and expenditure projections underlying the deficit target. ### Revenue structure, weaknesses, and reform options - Key observations: - Tax revenues are low because tax rates are low (especially for the ITBMS), many exemptions exist, tax expenditures are high and tax collection efficiency is weak. - Low tax revenues are partly compensated by non-tax revenues (mainly contributions from the Panama Canal Authority) but total general government revenue is low as well. - Staff recommendations to broaden the tax base and improve collection efficiency (government prefers not to raise main tax rates): - Review ITBMS tax exemptions and streamline the process for refunds. - Review exemptions and deductions from the PIT base. - Review tax incentives for CIT. - Consider raising cigarette and fuel excises to bring them in line with the externalities they cause. - Adopt a minimum corporate income tax for companies that pay taxes in the countries where they are headquartered (in response to the introduction of an international minimum tax). - Authorities’ actions and views: - Committed to reduce tax expenditures that could reduce economic inequality and to tax measures addressing profit-base erosion by multinationals. - Committed to reduce non-compliance with measures including a track-and-trace system for cigarettes and alcohol beverages, tightening withholding controls, and improving cross-checking of tax information. - Submitted a bill to impose VAT on digital services provided by non-resident platforms and taxpayers. ### Social security (CSS) pension deficit - Structure and current situation: - Two pension systems within CSS: (i) a defined benefit plan (closed to new participants in 2008) and (ii) a newer, mixed system (largely defined contributions). - The defined benefit plan is running deficits, currently financed through the pension fund’s reserves and an escrow fund established in 2004. - Reserves will run out in late 2024 or early 2025. - Deficit magnitudes and projections: - The deficit of the defined benefit pension system of about 1.1 percent of GDP in 2022 is partly offset by surpluses in other programs of the CSS, but current regulations disallow cross-subsidization. - The overall CSS deficit of about 0.7 percent of GDP is projected to remain relatively constant over the next few years. - Options and timing: - The government has not yet committed to a reform plan and is waiting for the “social dialogue” with employers and unions scheduled in early 2023. - Options include parametric reforms, such as raising the retirement age for not-yet retired participants, and finding new funding sources. ### Strengthening medium-term fiscal planning and public financial management - Recommendations: - Adopt a broader medium-term fiscal framework that sets out the levels of revenues and expenditures consistent with the deficit target of the non-financial public sector to enhance credibility. - Parliamentary approval of the General Budgetary Administration Law (expected in the first half of 2023) will further strengthen the fiscal strategy. - Planned IMF Technical Assistance (TA) and priorities: - TA to strengthen Customs effectiveness through an information exchange agreement with the tax administration and streamlining main customs processes. - TA in public financial management focuses on multi-annual budget preparation and management of fiscal risks, application of the IMF Fiscal Risk Assessment Tool, enhancing registration of accounts payable, and implementation of the new budget administration law. - Remaining weaknesses to address: - Government procurement and fiscal transparency, including publication requirements of key budget and procurement documents and covid-related spending. ### Anti–money laundering / countering financing of terrorism (AML/CFT) and FATF status - FATF status and action plan: - Panama has been on the FATF grey list since June 2019. - The FATF action plan covered: (i) national and sectoral ML/TF risks; (ii) supervision and sanctions against AML/CFT violations; (iii) verification and update of ultimate beneficial ownership (UBO) information; and (iv) investigation and prosecution involving foreign tax crimes. - Original deadlines: September 2020 for items (i) to (iii) and January 2021 for item (iv). - Progress: - By October 2022, the authorities had “largely addressed” 12 out of 15 action items, while “partly addressing” the remaining 3. - The FATF urged Panama to demonstrate significant progress by February 2023 or risk adverse action, which could include urging jurisdictions to apply enhanced due diligence to business relations and transactions with Panama. - Fintech and VASP regulatory gaps: - As of December 2022, 10 Fintech companies operated with authorizations from MICI, focusing on lending products and payment services. - These Fintechs are not currently subject to AML/CFT preventive measures at licensing or supervision by MICI or SBP. - Authorities’ view: VASPs should be designated as reporting entities subject to preventive measures and a competent supervisory authority should be designated; AML/CFT Law needs amendment to that effect. ### Financial sector resilience and banking sector oversight - Key metrics and buffers: - Aggregate capital and liquidity buffers are currently well above regulatory minima. - Capital adequacy ratio was 15 percent at end-September (minimum requirement 8 percent). - Liquidity buffers at end-2022 covered 57 percent of short-term deposits (regulatory requirement 30 percent). - Total assets amount to 210 percent of GDP. The sector contributes around 6.5 percent to GDP each year. - Stress testing: - The latest stress test adverse scenario: real GDP growth of -2 percent, unemployment rate of 18 percent; after accounting for all modified loans, all banks remain solvent although capital adequacy ratios of two small banks could fall below the Basel III minimum of 8 percent. - Supervisory focus and ongoing initiatives: - SBP supervision focuses on: (i) reclassification of modified loans and correct loan-loss provisioning; (ii) sound business strategies addressing asset quality and liquidity risks; and (iii) incorporating and managing climate risks in operational risk. - New Rule 11-2022 requires banks to incorporate climate risks in the measurement of operational risk. - BNP implemented recommendations from the first-time safeguards assessment completed in September 2020; legal framework for operationalizing the FES approved; foreign exchange investment practices enhanced. - Recommendations to further strengthen resilience: - Continue a risk-focused approach guided by solvency stress tests to ascertain credit risk, provisioning and capital buffers. - Institute liquidity stress tests (with IMF TA) to determine sufficiency of funding sources. - Expand the macroprudential toolkit with borrower-based measures for households (caps on loan-to-value and debt-service-to-income ratios) and map them to vulnerabilities; complete initiatives to enhance data collection to enable these indicators. - Implement the Basel III capital conservation buffer and surcharge for systemically important banks. - Require recovery plans for all banks; SBP to develop resolution plans for systemic banks. - Develop a deposit insurance scheme and an official lender of last resort function in the medium term; maintain the emergency liquidity window of the FES until reforms are implemented. - Crisis preparedness and safety nets: - The FES is a $1 billion financial stability fund comprising an emergency liquidity window to support banks ($500 million) and a credit facility to stimulate the economy; it is owned by the MEF and operated by BNP. - Authorities’ views: - Authorities highlight the banking system remains well capitalized and liquid and are committed to tight regulatory oversight. - They emphasized safety nets (especially the liquidity facility in the FES) are important and that intrusive supervision and intensive monitoring will continue. - They are committed to implement additional prudential measures including macroprudential tools and to refine banks’ management of climate risk. ### Growth composition, construction, and sustaining convergence - Construction sector: - Construction activity increased by 250 percent between 2009 and 2019. - At the peak in 2013 construction contributed 3.0 percentage point to annual growth. - Staff projects construction levels will stabilize, in which case the contribution to GDP growth will drop to zero. - Need for diversification: - To sustain rapid growth, other productive sectors must expand, including the export sector which—except for mining—has seen little expansion in the last two decades. ### Human capital, governance, and structural reform priorities - Diagnostic: - For its per capita income level, Panama scores poorly on governance and human capital relative to peers. - World Bank human capital index scores are low by regional and high-income country standards; human capital likely deteriorated during the pandemic due to schools being closed for more than 15 months. - Governance indicators (Worldwide Governance Indicators, 2021) show Panama performs similar to Latin America and Caribbean, but worse than Western Europe, North America, and CESEE. - Priorities to sustain convergence: - Improve human capital through better education and alignment of academic curricula with job market needs; promote knowledge exchange with industry leaders. - Expand vocational and on-the-job training (such as Aprender Haciendo for youth); support commuting and childcare infrastructure to move labor into productive sectors. - Provide tailored support to women and indigenous groups entering or re-entering the labor force; integrate women in the workforce through training and formalize entrepreneurial activities. - Improve governance by enhancing public sector efficiency and transparency: strengthen contract enforcement, public communication and outreach (including reliable data provision and timely information sharing), digitalization of government services, and address weaknesses in judicial independence, insolvency frameworks, and property rights. - Areas of relative strength: - Panama performs relatively well on regulatory quality, voice and accountability, and political stability and absence of violence/terrorism. *Source: IMF staff report excerpt contained in the provided PDF content.* ### 57. Other reforms include updating labor laws (overly stringent firing practices and restrictions ### 57. Other reforms include updating labor laws (overly stringent firing practices and restrictions ### Reforms to boost investment, innovation, and infrastructure - Update labor laws to address "overly stringent firing practices and restrictions on foreign workers coupled with a lack of skilled local labor thwart[ing] foreign investment." - Raise innovation capacity by "boosting incentives for investment in science and research." - Improve critical infrastructure by: - expanding road connectivity, - providing reliable utilities, - enhancing the energy matrix and water management. ### Authorities’ views on human capital and productivity - Authorities agree on the need to boost human capital and productivity. - Education spending increase aims at boosting academic outcomes with focus on: - primary education, - digital literacy, - English proficiency. - Measures to boost productive capacity include: - digitizing public service delivery, - enhancing workforce skillset and digital literacy through training programs, - reducing labor market informality. - Government is working on simplifying and automating government procedures and improving citizen engagement to reduce corruption perceptions. ### Improving statistics — current shortcomings and timeliness issues - Data is "broadly adequate for surveillance albeit with some shortcomings, particularly on timeliness." - Example timeliness shortfall: "2022Q2 BOP data was only published in January 2023." - Staff turnover and ongoing census and GDP rebasing projects have caused broad delays in release of macroeconomic statistics including labor and external sector data, and impacted timely publication of the IMAE. - Panama can currently only publish the IMAE with a timeliness of "55 days," while the SDDS requires "6 weeks." - Compliance with the current eGDDS targets set by the authorities for timeliness and frequency is required. ### Ongoing statistical projects - Seasonal adjustment methodology for the monthly IMAE indicator—supported by IMF TA—will: - support high-frequency monitoring, - reflect the current economic structure and growth engines. - The National Statistical Plan (NSP) "2021-25" will foster statistical development and help advance toward SDDS subscription. - Authorities prioritize the population census as well as the GDP and CPI rebasing exercises as "key priorities for 2023." ### Staff appraisal — fiscal, financial, and structural policy guidance - Policy focus: "Post-pandemic policies should focus on rebuilding buffers and ensuring the convergence of Panamanian income levels with those in advanced countries continues." - Fiscal policy: - Government plans to reduce the overall NPFS deficit to "3 percent in 2023" and "1½ percent of GDP in 2025" are appropriate. - To sustainably reduce the fiscal deficit while preserving social spending and creating room for more education spending, tax revenue will need to increase. - Key measures: improving tax and customs collection efficiency and broadening the tax base—by reducing exemptions, deductions, and tax expenditures. - AML/CFT and international compliance: - "Exiting the FATF grey list remains a priority." - Authorities need to expediently address the remaining deficiencies in Panama’s AML/CFT regulatory framework identified by the FATF. - Financial sector resilience: - With no lender of last resort and deposit insurance, "it is imperative that the banking system remains well-capitalized and liquid." - Current capital-adequacy and liquidity indicators in the banking system are "well above regulatory minima." - Recommended actions: continued intensive supervision and monitoring and expanding the macroprudential policy toolkit to mitigate future asset quality and liquidity risks. - Fintech companies should be subject to AML/CFT regulation and supervision. - The ongoing FSAP will further inform the performance and vulnerabilities in Panama’s financial system. - Growth and structural transformation: - "Going forward, it is likely that construction will not provide the same boost to growth as it has in the past two decades." - For convergence to continue, other sectors will need to take over. - Bringing human capital and governance standards in line with those in advanced countries would help. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1panea2023002.pdf* ### 69. It is recommended that the next Article IV consultation takes place on the standard ### 69. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Real sector developments - The economic contraction was sharp and especially drastic in Q2-2020, followed by a resolute recovery in 2021. - All sectors (but mining) experienced a contraction in 2020, with construction contributing the most. - Before the pandemic, investment was already weak, with consumption and exports propelling growth. - Prices were soft in 2020, reflecting weak demand, but inflation picked up in 2021-22 amid supply shocks. - Employment growth collapsed during the pandemic, with the services sector affected the most, with a partial recovery in 2021. - Real GDP (2007 prices) growth: - 2018: 3.7 - 2019: 3.0 - 2020: -17.9 - 2021: 15.3 - 2022: 9.0 - 2023–2028 (projections): 5.0, 4.0, 4.0, 4.0, 4.0, 4.0 - Output gap (% of potential): 4.2; 2.0; -17.1; -6.3; -0.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 (2018–2028 sequence). ### Fiscal developments - The fiscal deficit widened significantly as a result of the pandemic, but experienced a cyclical improvement in 2021. - Revenue and expenditure (In percent of GDP, NFPS): - Revenue: 15 (2015) to 23 (2021) trend shown in figure. - Expenditure: corresponding rise in 2020 then partial unwinding in 2021. - Non-tax revenue explains most of the 2021 revenue recovery; Panama Canal transfers are significant within non-tax revenue. - Challenges persist in tax and customs administration, and tax exceptions continue to affect tax and tariff collection. - Public investment had started to recover as covid-related spending receded. - Public debt peaked in 2020, but declined in 2021 reflecting a lower-than-expected deficit. - Summary NFPS indicators (Table 2, percent of GDP): - Revenues (2018–2028): 19.8; 18.5; 18.3; 18.2; 19.0; 19.9; 20.1; 20.4; 20.5; 20.6; 20.8 - Expenditure (2018–2028): 23.0; 21.9; 28.6; 24.8; 22.9; 22.9; 22.2; 21.9; 22.0; 22.1; 22.3 - Overall Balance (incl. ACP, 2018–2028): -2.9; -3.1; -9.2; -6.5; -3.8; -2.7; -1.8; -1.2; -0.9; -0.9; -1.0 - Primary balance (excl. ACP, memo): -1.5; -1.8; -8.0; -4.6; -2.3; -0.9; 0.3; 0.9; 0.7; 0.6; 0.5 - Central government (Table 3, percent of GDP): - Revenues and Grants (2018–2028): 13.9; 12.7; 12.5; 12.2; 13.3; 14.1; 14.3; 14.5; 14.6; 14.7; 14.9 - Total Expenditure (2018–2028): 17.5; 17.3; 22.6; 19.4; 17.4; 17.6; 16.8; 16.4; 16.5; 16.6; 16.7 - Overall Balance (central government, 2018–2028): -3.7; -4.5; -10.1; -7.2; -4.1; -3.5; -2.5; -2.0; -1.9; -1.9; -1.8 - Notes: - COVID-19 related expenditure (central government) peaked 3.0 (2018 baseline), 2.5 (2019), 0.9 (2020), 0.0 (2021 onward) in percent of GDP as reported. - In 2022, Table notes that a one-off land sale by the central government to the ACP is included in capital revenue. ### External sector developments and balance of payments - Overall balance declined after temporary current account improvement during the pandemic. - Current account widened with economic recovery amid rising food and fuel imports, despite higher copper exports. - Financial account inflows resumed while external debt ticked up with high public debt issuance and a GDP denominator effect. - Sovereign bond spread (EMBIG) has been relatively low compared to peers. - REER continues to depreciate as inflation in Panama is relatively lower than peers. - Summary balance of payments (Table 7, percent of GDP): - Current Account (2018–2028): -7.6; -5.0; -0.4; -3.2; -3.9; -4.0; -3.5; -3.0; -2.8; -2.7; -2.5 - Exports, f.o.b. (2018–2028): 7.7; 8.9; 8.5; 12.8; 13.2; 13.1; 12.8; 12.5; 12.3; 12.1; 11.9 - Imports, f.o.b. (2018–2028): 24.4; 22.9; 16.8; 20.9; 24.8; 24.2; 24.0; 23.5; 22.8; 22.5; 22.2 - Of which: Copper export contribution: 0.0; 1.2; 2.0; 4.4; 4.2; 4.4; 4.3; 3.9; 3.5; 3.2; (2018–2026 sequence shown) - Financial Account (2018–2028): -9.4; -7.0; 0.1; -1.7; -3.9; -4.0; -3.5; -3.0; -2.8; -2.7; -2.5 - Foreign direct investment, net (2018–2028): -7.5; -5.6; -0.1; -2.6; -4.0; -4.3; -4.3; -4.2; -4.1; -3.9; -3.8 - External vulnerability indicators (Table 8): - Gross international reserves at end of period (millions US$): 3,149; 4,375; 9,930; 8,832; 9,752; 10,379; 10,958 (2018–2024 sequence). - Reserves in months of imports of goods and services: 1.4; 3.0; 4.9; 3.5; 3.6; 3.6; 3.5 (2018–2024). - Non-Financial Public Sector external debt (percent of GDP): 31.1; 35.2; 54.1; 50.6; 50.9; 50.8; 51.1 (2018–2024). ### Banking sector soundness - Nonperforming loans (NPLs) rose following the onset of the covid-19 pandemic; provisioning increased with adoption of stricter provisioning requirements. - Profitability is recovering as net interest margins recover slightly. - Banks’ capital adequacy remains above regulatory minimum while liquidity levels continue to be high. - Financial Soundness Indicators (Table 6, percent, end-of-period): - Regulatory capital to risk-weighted assets (2015–2022Q3): 14.9; 15.3; 16.0; 15.7; 15.2; 15.7; 15.8; 15.3; 14.9; 15.0 - Nonperforming loans to total gross loans (2015–2022Q3): 2.2; 2.5; 3.1; 3.3; 2.0; 2.0; 2.3; 2.5; 2.7; 2.6 - Provisions to nonperforming loans (2015–2022Q3): 35.9; 41.2; 38.3; 53.7; 102.4; 148.0; 173.7; 157.5; 141.4; 144.4 - Return on assets (2015–2022Q3): 1.5; 1.3; 1.6; 1.6; 1.5; 0.7; 1.0; 1.2; 1.3; 1.3 - Capital adequacy (capital to assets, leverage ratio, 2015–2022Q3): 10.2; 11.4; 12.5; 12.5; 12.7; 11.8; 12.2; 11.9; 11.6; 11.7 - Liquid assets to total assets (2015–2022Q3): 12.0; 11.9; 13.2; 10.3; 10.0; 10.7; 11.4; 10.8; 10.6; 10.2 ### Balance of payments — trade and services - Exports of goods have increased thanks to copper; the trade deficit is offset by a surplus on services. - Services rely on the Panama Canal and tourism; income outflows are mainly from direct investment. - High-frequency trade data: - Exports and re-exports, tolls, CFZ activity, and tourist arrivals show recovery in 2021–2022. - Imports rebounded especially for oil and fuel. - Merchandise trade excluding Colón Free Zone, net (Table 7, percent of GDP): -16.7; -14.1; -8.3; -8.1; -11.6; -11.1; -11.2; -11.0; -10.5; -10.4; -10.3 (2018–2028). ### Investment and construction - Investment rose sharply with a surge in construction. - Gross Fixed Capital Formation (GFCF) (Percent of GDP) and components: - GFCF increased notably in the past decade; construction share particularly strong. - Construction surge driven by residential buildings, other buildings, and other constructions & works. - The increase and level of the construction-to-GDP ratio in Panama in the past decade has been much stronger than in other well-known examples of countries that experienced construction booms (comparison figure includes Ireland, Spain, Greece, United States, Latvia, Panama). ### Labor markets - Panama’s unemployment rate declined sharply post-covid as employment recovered in 2021. - Employment rose both as a share of population and working-age population, though not yet to pre-pandemic levels. - The share of working-age population has risen steadily over time, indicating favorable labor-market potential. - Selected indicators: - Total unemployment rate (October, 2021): 11.3 (Table 1). - Employment to population and employment to working-age population series show recovery trends (figures). ### Key macroeconomic and social indicators (Table 1 highlights) - Population (millions, 2021): 4.3 - Poverty line (percent, 2019): 21.5 - Population growth rate (percent, 2021): 1.4 - Adult literacy rate (percent, 2019): 95.7 - Life expectancy at birth (years, 2019): 78.5 - GDP per capita (US$, 2021): 14,664 - Total unemployment rate (October, 2021): 11.3 - IMF Quota (SDR, million): 376.8 - Nominal GDP (in millions of US$), 2021: 63,605; projections through 2028 provided in Table 1. ### Public debt and financing - Total Public Debt (Non-Financial Public Sector, percent of GDP, Table 4): - 2018: 37.3 - 2019: 41.9 - 2020: 65.6 - 2021: 58.4 - 2022–2028 (projections): 55.4; 54.9; 54.1; 53.2; 52.4; 51.5; 50.8 - Central Government Gross Debt (percent of GDP, Table 4): - 2018: 42.3 - 2019: 47.1 - 2020: 72.2 - 2021: 64.1 - 2022: 60.5 - 2023–2028 (projections): 59.6; 58.5; 57.4; 56.3; 55.2; 54.3 - Net debt and financial assets series shown in Table 4; staff adjustments for unrecorded expenditure and other provisional items are noted. *Source: IMF staff calculations and national authorities as presented in the Panama country report figures and tables.* ### Annex I. Implementation of Past IMF Policy Advice ### Annex I. Implementation of Past IMF Policy Advice ### Fiscal Policy - The Social and Fiscal Responsibility Law (SFRL)—streamlined in October 2018 and further modified in response to the covid-19 pandemic—continues to be the anchor, in line with IMF’s recommendations. - Recent initiatives to improve tax transparency standards: - New tax transparency law (No. 254 of November 11, 2021) imposes additional requirements on legal entities regarding the provision of accounting records. - Panama increased the tax rate on its Multinational Enterprise Headquarters regime (from zero to 5 percent), in line with IMF TA recommendations. ### Financial Integrity and Tax Transparency - Since Panama was grey listed by the FATF, IMF advice on AML/CFT focused on assisting the authorities (CNBC, MEF, SSNF) to address selected outstanding action items on its action plan. - IMF technical assistance covered: - Risk assessments; - Supervision of DNFBPs; - Transparency of legal persons and legal arrangements. - Authorities have made progress in areas of the AML/CFT regime identified as deficient by the FATF, but outstanding action items remain to strengthen effectiveness and exit the FATF grey list. ### Financial Sector Soundness and Reforms - Moratorium on loan service and grace period for restructuring ended: - Moratorium ended on June 30, 2021. - Grace period for restructuring ended on September 30, 2021. - Authorities undertook stress tests to guide recalibration of provisions for modified loans and increased provisioning on banks that are highly exposed and vulnerable. - Prudential supervision on banks intensified, consistent with IMF staff advice. - Regulatory framework and liquidity: - Basel III capital adequacy framework implemented in 2018. - Liquidity Coverage Ratio (LCR) was gradually phased-in. - Legal Liquidity Index (LLI) defines a 30 percent minimum requirement on liquid assets (including cash and certain debt securities) as a share of qualifying deposits, with a time horizon of 186 days. - The Financial Stability Report 2021 included macroprudential analysis covering household and corporate vulnerabilities, aligned with Technical Assistance on Macroprudential Policy for Systemic Risks. ### Data Adequacy - National Statistical Plan 2021-25 is aligned with Fund advice from the ROSC. - Recent advances in dissemination of fiscal and internal reserves and foreign liquidate data have addressed most pending requirements for Panama to subscribe to the Special Data Dissemination Service. - Ongoing GDP rebasing exercise expected to better reflect current economic structure and growth engines. ### Structural Reforms - As covid-related support is phased out, authorities maintained targeted social transfer programs using a registry of beneficiaries to sustain consumption needs of the vulnerable, in line with Fund recommendations. - Limited progress in other public policy areas (education, healthcare, gender equity, social inclusion) due to pandemic delays. - Infrastructure development has resumed somewhat; construction of the third Panama City metro line is underway. ### Key Policy Recommendation Summaries - Strengthen and fully implement the FATF action plan to improve AML/CFT effectiveness and exit the FATF grey list. - Continue calibrating bank provisioning and prudential supervision; maintain macroprudential monitoring. - Complete GDP rebasing and improve data dissemination to meet SDDS requirements. - Maintain targeted social transfers and advance non-pandemic-delayed structural reforms (education, healthcare, gender equity, social inclusion). - Advance infrastructure projects while preserving fiscal credibility under the SFRL. *Source: Annex I. Implementation of Past IMF Policy Advice* ### 6.7 percent of GDP in October 2022, reflecting the payment of external obligations. ### 1panea2023002 - 6.7 percent of GDP in October 2022, reflecting the payment of external obligations. ### Reserves, liquidity, and sovereign assets - Assessment: Panama’s reserve level is adequate. - Central government deposit at commercial banks: corresponded to 2.6 months of central government expenditures in 2022, well above the best practice of 1 month of expenditure. - Sovereign Wealth Fund (SWF): about 2 percent of GDP in foreign assets abroad; could be considered adequate to cover the financial needs of a relatively lean government with small deficits during normal times. - Banking sector liquidity: Liquid assets in the banking sector covered 57 percent of short-term deposits at end-2022 (nearly double the minimum statutory requirement of 30 percent), reinforcing the high level of liquidity buffer in the banking sector. ### External debt sustainability (key findings and scenarios) - Baseline external debt path and shocks (selected figures from bounds and scenarios): - Baseline external debt (percent of GDP): 2017: 149.6; 2018: 153.0; 2019: 155.0; 2020: 209.4; 2021: 188.3; 2022: 169.4; 2023: 168.1; 2024: 167.0; 2025: 166.5; 2026: 166.0; 2027: 164.3; 2028: 162.5. - Debt-stabilizing non-interest current account (long-run): -8.2 (percent of GDP). - Change in external debt (line 2): 2017: -10.3; 2018: 3.4; 2019: 2.0; 2020: 54.3; 2021: -21.0; 2022: -18.9; 2023: -1.3; 2024: -1.1; 2025: -0.6; 2026: -0.5; 2027: -1.6; 2028: -1.8 (all in percent of GDP). - Identified external debt-creating flows (line 3): 2017: -12.1; 2018: -6.1; 2019: -5.3; 2020: 37.6; 2021: -31.0; 2022: -15.2; 2023: -8.2; 2024: -7.1; 2025: -7.5; 2026: -7.6; 2027: -7.5; 2028: -7.5 (percent of GDP). - Current account deficit, excluding interest payments (line 4): 2017: 1.8; 2018: 4.5; 2019: 1.9; 2020: -4.0; 2021: 0.3; 2022: -1.9; 2023: -3.3; 2024: -3.5; 2025: -3.2; 2026: -2.8; 2027: -2.5; 2028: -2.5 (percent of GDP). - Net non-debt creating capital inflows (line 8; negative values indicate inflows): 2017: -7.1; 2018: -7.5; 2019: -5.6; 2020: -0.1; 2021: -2.6; 2022: -4.0; 2023: -4.3; 2024: -4.3; 2025: -4.2; 2026: -4.1; 2027: -3.9; 2028: -3.8 (percent of GDP). - Automatic debt dynamics (line 9): 2017: -6.8; 2018: -3.1; 2019: -1.6; 2020: 41.7; 2021: -28.7; 2022: -9.3; 2023: -0.6; 2024: 0.7; 2025: -0.1; 2026: -0.7; 2027: -1.0; 2028: -1.1 (percent of GDP). - Contribution from nominal interest rate (line 10): 2017: 4.2; 2018: 3.1; 2019: 3.1; 2020: 4.3; 2021: 3.0; 2022: 5.8; 2023: 7.3; 2024: 7.0; 2025: 6.2; 2026: 5.6; 2027: 5.3; 2028: 5.1 (percent of GDP). - Contribution from real GDP growth (line 11): 2017: -8.3; 2018: -5.3; 2019: -4.4; 2020: 34.5; 2021: -27.2; 2022: -15.1; 2023: -7.9; 2024: -6.3; 2025: -6.3; 2026: -6.3; 2027: -6.3; 2028: -6.2 (percent of GDP). - Residual, incl. change in gross foreign assets (line 13): 2017: 1.9; 2018: 9.6; 2019: 7.3; 2020: 16.7; 2021: 10.0; 2022: -3.7; 2023: 6.9; 2024: 6.0; 2025: 6.9; 2026: 7.0; 2027: 5.8; 2028: 5.7 (percent of GDP). - External debt-to-exports ratio (in percent): 2017: 342.7; 2018: 348.1; 2019: 362.8; 2020: 571.0; 2021: 438.2; 2022: 378.6; 2023: 377.2; 2024: 369.3; 2025: 366.4; 2026: 363.8; 2027: 358.6; 2028: 353.5. - Gross external financing need (in billions of US dollars; line and percent of GDP noted separately): - Values: 2017: 50; 2018: 8; 2019: 13.2; 2020: 46; 2021: 24.9; 2022: 56; 2023: 77.6; 2024: 44.7; 2025: 87.7; 2026: 44.8; 2027: 99.3; 2028: 49.3; 2029: 116.5; 2030: 27.9; 2031: 54.6; 2032: 67.7; 2033: 83.5; 2034: 97.2; 2035: 77.7; 2036: 61.7; 2037: 94.8. - In percent of GDP: 81.7; 72.1; 68.2; 77.4; 70.3; 10-Year and 68.7; 64.5; 64.1; 63.2; 62.0; 61.5; 60.0 (note: table includes mixed-format entries as presented). - Scenario notes: - Individual shocks: permanent one-half standard deviation shocks applied to real interest rate, growth rate, and current account balance. - Historical scenarios: historical averages calculated over the ten-year period and used to project debt dynamics five years ahead. - Combined shock and other scenario labels appear in figures with resulting terminal debt levels (examples: interest-rate shock terminal debt 166 vs baseline 164; growth shock terminal debt 205 vs baseline 164; combined shock terminal debt 189 vs baseline 164). ### Public debt, fiscal projections, and contributors to debt dynamics - Public debt (percent of GDP) — baseline actual and projections (selected years): - Actual 2021: 58.4; 2022: 55.4; 2023: 54.9; 2024: 54.0; 2025: 53.0; 2026: 52.2; 2027: 51.4; 2028: 50.9; 2029: 50.3; 2030: 49.5; 2031: 48.6. - Change in public debt (percent of GDP): -7.1 (2021), -3.0 (2022), -0.5 (2023), -0.9 (2024), -1.0 (2025), -0.9 (2026), -0.8 (2027), -0.4 (2028), -0.7 (2029), -0.8 (2030), -0.9 (2031). - Contribution of identified flows to change in public debt: -2.9 (2021), -2.7 (2022), -0.2 (2023), -0.6 (2024), -0.7 (2025), -0.6 (2026), -0.5 (2027), -0.2 (2028), -0.4 (2029), -0.5 (2030), -0.7 (2031) (percent of GDP). - Primary deficit (percent of GDP): 4.6 (2021), 2.3 (2022), 0.9 (2023), -0.3 (2024), -0.9 (2025), -0.7 (2026), -0.6 (2027), -0.5 (2028), -0.5 (2029), -0.5 (2030), -0.5 (2031). - Noninterest revenues (percent of GDP): 17.8 (2021), 18.6 (2022), 19.6 (2023), 19.8 (2024), 20.1 (2025), 20.2 (2026), 20.4 (2027), 20.5 (2028), 20.5 (2029), 20.5 (2030), 20.5 (2031). - Noninterest expenditures (percent of GDP): 22.4 (2021), 20.9 (2022), 20.5 (2023), 19.5 (2024), 19.2 (2025), 19.5 (2026), 19.7 (2027), 20.0 (2028), 20.0 (2029), 20.0 (2030), 20.0 (2031). - Automatic debt dynamics (percent of GDP): -7.5 (2021), -4.2 (2022), -1.4 (2023), -0.7 (2024), -0.4 (2025), -0.5 (2026), -0.6 (2027), -0.4 (2028), -0.6 (2029), -0.7 (2030), -0.7 (2031). - Real GDP growth (percent): 15.3 (2021), 9.0 (2022), 5.0 (2023), 4.0 (2024), 4.0 (2025), 4.0 (2026), 4.0 (2027), 4.0 (2028), 4.0 (2029), 4.0 (2030), 4.0 (2031). - Gross financing needs (percent of GDP): 14.5 (2021), 8.0 (2022), 7.0 (2023), 7.2 (2024), 4.9 (2025), 5.9 (2026), 4.4 (2027), 4.3 (2028), 4.9 (2029), 6.0 (2030), 6.4 (2031). - Of which: debt service (percent of GDP): 10.3 (2021), 6.0 (2022), 6.4 (2023), 7.8 (2024), 6.0 (2025), 6.9 (2026), 5.3 (2027), 5.0 (2028), 5.6 (2029), 6.7 (2030), 7.1 (2031). - Local currency debt service and foreign currency split presented as: Local currency values match debt service line for these years; Foreign currency shows 0.6 (2021) and 0.0 thereafter. ### Debt coverage, disclosures, and public-sector perimeter - Non-financial public sector (NFPS) perimeter defined by Law 31 of 2011: primarily includes the central government, the social security agency (CSS), public enterprises, and consolidated government agencies. - Exclusions from NFPS: public enterprises such as ENA, ETESA, and AITSA; non-consolidated agencies; and the Panama Canal Authority. - Coverage table highlights: - Budgetary central government: Yes (included in baseline coverage). - Extra-budgetary funds (EBFs): No. - Social security funds (SSFs): Yes. - State governments: Yes. - Local governments: Yes. - Public nonfinancial corporations: Yes. - Central bank: No. - Other public financial corporations: No. ### Public debt structure and currency, maturity, and holder composition (summary) - Panama is a dollarized economy and has held only U.S. dollar-denominated debt after 2021. - Larger share of public debt is held externally. - Public debt expected to have mostly long-term maturity in the forecast horizon. - Residual maturity: 6. years (as presented). ### Risk assessment, stress testing, and medium-term risk analysis - Debt Fanchart and GFN Financeability indexes (selected indicators): - Fanchart width: 60.2 0.9 (as presented). - Probability of debt not stabilizing (pct): 23.1 0.2 (as presented). - Terminal debt level x institutions index: 28.2 0.6 (as presented). - Average GFN in baseline: 6.2 2.1 (as presented). - Bank claims on government (pct bank assets): 3.5 1.1 (as presented). - Change in claims on govt. in stress (pct bank assets): 9.6 3.2 (as presented). - GFN financeability index: 6.4 (presented as summary). - Commentary on risk: - Debt Fanchart Module indicates a moderate level of risk mainly due to volatility of projections, with debt-to-GDP ratios rising above their 2020 peak in the 75-95 percentile range of the simulation. - GFN Financeability Module suggests an overall low level of risk, although financing needs could increase significantly in a stress scenario with macro-fiscal shocks, a sudden shortening of debt maturity, and a debt-holder shock with domestic banks acting as residual creditors. - Probabilities related to crisis prediction (2022-2027): - Prob. of missed crisis, 2022-2027 (if stress not predicted): 9.1 pct. - Prob. of false alarm, 2022-2027 (if stress predicted): 42.0 pct. ### Commentary and policy-relevant observations from the analysis - Growth dynamics have contributed the most to the trajectory of debt since the beginning of the pandemic, but fiscal discipline will progressively increase its role in reducing the debt burden over the projection horizon. - In the baseline, the authorities' commitment to the NFPS deficit target of 1.5% of GDP starting in 2025 per the SFRL will help to progressively reduce the debt-to-GDP ratio, albeit not to pre-pandemic levels. - Interest rates and global financial tightening will contribute to slowing the debt adjustment. *Source: IMF staff analysis as presented in the provided content.* ### Annex V. Management of the Banking Sector During the Covid- ### Annex V. Management of the Banking Sector During the Covid-19 Pandemic ### Pandemic impact on the economy and banking sector - Panama’s GDP contracted by 17.9 percent in 2020. - Unemployment rose to 18.5 percent in September 2020 (from 7.1 percent in 2019). - Many borrowers were unable to service loans, creating pressure on banks’ asset quality and prospects of a significant increase in NPLs. ### Temporary borrower relief measures (moratorium and restructuring) - Authorities implemented a temporary moratorium on loan service from March until the end of 2020 in the form of voluntary loan restructuring, grace periods, and in some cases interest rate reduction. - Under the moratorium, loans modified under the moratorium (modified loans) would not be classified as nonperforming loans (NPL). - Share of modified loans: - 38.8 percent of total loans in April 2020 (local portfolio). - Peaked at 47.6 percent in July 2020. - Declined to 42.2 percent at end-2020. - Reduced further to 16.8 percent of total loans at end-2021. - Reduced to 11.9 percent of total loans at end-first quarter 2022. - Moratorium timeline: - Initially through December 31, 2020 (Law 156, gazetted July 1, 2020, effective retroactively as of March 1, 2020). - Extended until June 30, 2021 (announcement by President Cortizo in October 2020). - Moratorium formally ended in June 2021; a three-month window period (July 1 to September 30, 2021) designated for banks and remaining affected borrowers to negotiate and restructure modified loans. - Vaccination campaign: 70 percent of Panama’s population had been vaccinated with at least one dose of the covid-19 vaccine by November 2021. - Modified loans that are serviced for six consecutive months were reclassified as normal loans. ### Prudential and fiscal support for banks - SBP allowed use of dynamic provisions amounting to US$1.3 billion (about 2 percent of GDP) to absorb write-offs; only five banks used such provisions. - An ad hoc regulatory requirement required banks to create a provision equivalent to 3 percent of the gross modified loan portfolio. - Impact on provisioning: - Total loan-loss provision increased to 148 percent of NPL in 2020 (from 102 percent of NPL in 2019). - Capital and liquidity metrics: - Total regulatory capital adequacy ratio averaged 15.7 percent in 2020. - At end-2021, total regulatory capital adequacy ratio stood at 15.9 percent (compared to 15¾ percent as of end-2020), against a minimum requirement of 8 percent. - Short-term assets covered 60 percent of short-term deposits as of end-December 2021 (63½ at the end of 2020), versus the regulatory minimum of 30 percent. - No banks used the liquidity facility under the FES. ### Classification and regulatory guidance for modified loans - To ensure adequate recognition of credit risks within the modified portfolio, SBP issued Rule 3 2021 to guide classification of modified loans based on borrower loan service and restructuring progress. - Table AV.1 (Rule 3, 2021) categories (summarized descriptions): - Modified Normal: Bank agreed to modify terms until June 30, 2021; borrower is in compliance with new terms. - Modified Special Mention: Bank agreed grace periods; borrower in compliance with the grace period. - Modified Subnormal: Bank agreed new terms during July 1–September 30, 2021; borrower in compliance. - Modified Doubtful: Affected borrowers contacted the bank as of June 30, 2021 but cannot meet restructuring terms; bank continues contact. - Modified Irrecoverable: Borrowers have totally or partially breached terms, or as of June 30, 2021 have not contacted the bank to establish a payment agreement. - Migration back to pre-pandemic classification: - In November 2022, SBP adopted Rule 12-2022 to re-classify modified loans based on the original regulation before the pandemic (Rule 4-2013), effective from January 2023. ### Box: Legal framework and moratorium specifics - Law 156 (enacted June 30, 2020; gazetted July 1, 2020; effective retroactively as of March 1, 2020) established a moratorium period until December 31, 2020 for certain credits from banks, finance companies, and cooperatives. - Definition of “affected borrowers”: those whose employment contract has been suspended or terminated, independent workers, and business entities affected by government containment measures. - Types of credits included: residential mortgages, personal loans, car loans, credit cards, loans to small and medium-sized companies, commercial loans, consumer loans, and loans to the transportation and agricultural sectors. - During moratorium: - Banks, finance companies and cooperatives forbidden to increase interest rates or collect surcharges or any other interest for loans included in the moratorium. - Credit history of affected borrowers would not be affected throughout the national state of emergency, and up to 60 days after its conclusion. - Post moratorium: - Creditors and affected borrowers will negotiate refinancing or pro-rating of the loan by mutual agreement, without charging fees for late payment or administrative expenses, and credit references of affected borrowers remain unaffected. ### Outcomes and assessment - The authorities’ approach is assessed as successful in safeguarding financial stability: - NPL ratio: 2.0 percent in the fourth quarter of 2020 (1.7 percent in the first quarter of 2020); rose to 2.7 percent in the second quarter of 2022 following recognition of credit losses after the end of the moratorium. - Banks remained well capitalized and liquid through the pandemic. - As economic activity reopened, modified loans declined and loan service improved, supporting a gradual normalization of asset quality. *Source: Annex V. Management of the Banking Sector During the Covid-19 Pandemic (excerpts).* ### 3.7 percent of GDP in 2020 and 5.8 percent of GDP in 2021. The expansion of mining activity offset ### 1panea2023002 - 3.7 percent of GDP in 2020 and 5.8 percent of GDP in 2021. The expansion of mining activity offset ### Real economy: sector contributions and construction trends - Construction shares in Panama’s GDP: - "ran in double digits since 2012, peaking at 18.3 percent in 2018, and declining to 13.2 percent in 2021" - "still more than double the share of mining." - Mining and overall output: - "3.7 percent of GDP in 2020 and 5.8 percent of GDP in 2021." (context: mining expansion offset some output losses due to the slump in construction) - Contribution to Real GVA Growth by Industry: period arithmetic averages shown for subperiods including 1996-2006, 2006-2007, 2007-2019, 2019-2021 (figure referenced in source). ### Annex VIII — Panama’s Climate Policy Options - Fiscal and resilience actions: - Authorities allocated "US$100 million in 2020" to support populations affected by Hurricane Eta and tropical storm Iota. - Panama has "a committed amount of US$100 million from The World Bank through a Catastrophe Deferred Drawdown Option (Cat-DDO)." - Water resource management priorities: - Key vulnerabilities: increased rainfall volatility, two main reservoirs for the Canal and population have "occasionally reached worryingly low levels." - Local distribution losses: "estimated to lose more than 40 percent of the transported water due to widespread leakages." - Actions suggested: desalinization, construction of a third reservoir, efficiency improvements and repairs, and revision of public water fees "kept unchanged at a low level since 1982." - Carbon tax assessment using CPAT: - Policy scenario: introduction of a carbon tax in 2024 bringing carbon price to "50 real US$ per ton of CO2 equivalent by 2030." - Fiscal and environmental impacts estimated: - Could raise "between 0.1 and 0.6 percent of GDP in government revenues each year over the following decade." - Could reduce baseline emissions "by up to 5 million tons in CO2 equivalent." - Could raise net welfare "by 0.6 percent of GDP by the end of the same period." - Figure referenced: "Figure AVIII.1. Panama: Effects of a Carbon Tax that Gradually Brings Carbon Prices from 20 to 50 Real US$ per tCO2e between 2024 and 2030." ### Annex IX — Progress towards exiting the FATF grey list - Key actions taken (2021–22 and earlier): - New key appointments to national AML/CFT team. - Applied risk-based supervision to designated non-financial businesses and professions. - Used Practical Guide for Parallel Financial Investigations. - Approved "Law 254" resolving legal impediments to action-plan implementation. - Updated sectoral risk assessment and implemented the "SSNF Supervision Manual." - Enhanced risk-based monitoring and supervision of the corporate sector. - Designed and implemented a digital platform to collect UBO information for active firms. - Remaining action items to be upgraded to “largely addressed”: - "ensuring adequate verification of up-to-date UBO information by reporting entities and timely access by competent authorities;" - "establishing effective mechanisms to monitor the activities of offshore entities and further implementing the specific measures to prevent the misuse of nominee shareholders and directors;" - "demonstrating the country’s ability to investigate and prosecute money laundering involving foreign tax crimes." - Specific progress and metrics: - "As of February 8, 2023, the UBO registry contained UBO information on 78,637 companies, or close to 33 percent of total active firms." - Two largest law firms have "uploaded over 90 percent of their registered companies." - The digital platform "entered verification phase in 2022-Q4." - SSNF action on lawyers and certified public accountants: "Resolución JD-02-2022" issued on July 28 2022 addressing preventive measures and controls to prevent misuse of nominee shareholders and directors. - Investigations on foreign tax crimes in last two years: "started nine investigations"; "seven remain at preliminary investigation stages, while one advanced significantly, and one resulted in an international warrant." - SSNF capacity expansion and supervisory activity: - Budget: "2023 budget rose to US$10.7 million from US$2.4 million in 2019 (by 4.5 times)," with "special funds (US$3.6 million in 2023) earmarked for the UBO registry." - Staffing: increased from "one in April" 2022 to "six in December" 2022 (projected rise to "13 in 2023"). - Supervision activity increases (as of November 2022 vs 2021): - Onsite supervisions increased "96 percent." - Offsite supervisory activities increased "1571 percent." - Sanctions: rose from "1 (in the amount of US$5,000) in 2019 to 16 in 2022 (US$491,845)." ### Annex X — Risks of disruptions in mining activities (Cobre Panamá) - Background and project scale: - Concession history: initial 20-year concession agreed in February 1996; Contract-Law No. 9 approved February 1997; concession extended by ministerial resolution in December 2016 for an additional 20-year period. - Total investment to date: "at least 10 billion dollars," according to Minera Panamá’s Financial Statements. - Production and mine life: - Estimated annual production: "400,000 tons of copper, 150,000 oz of gold, and 3,500 tons of molybdenum each year for at least the coming 10 years, gradually declining afterwards, with a mine life of more than 30 years." - Economic contribution: INDESA estimates Minera Panamá's "direct contribution to Panama's GDP is about 3.2 percent, and its indirect contribution another 1.6 percent." - Copper exports accounted for "4.4 percent of GDP in 2021." - Fiscal regime under Law-9 concession: - Company required to pay "a 2 percent royalty on a net smelter return basis" and is "exempt from most other taxes (except for social security contributions on employee wages) as long as it has an outstanding debt related to the project." - Recent developments and negotiations: - Government proposal (January 2022) sought to end tax holiday and reinstate: - corporate income taxes at "the standard 25 percent rate," - general withholding regimes, - royalties of "12-16 percent of the operating margin with some cost deduction exclusions," - and a yearly minimum payment ensuring corporate income taxes, withholding taxes, and royalties together are "always greater than or equal to US$375 million." - Minera Panamá’s position: current "royalties at 2 percent of revenues are above the average royalty rate expected from a mine of the same ore grade" per KPMG analysis; company argues original contract conditions should remain given outstanding debt. - Negotiation timeline: negotiations "failed to meet the deadline set for December 14, 2022." On December 15, 2022, government requested a "care and maintenance" plan to be presented within 10 business days; negotiations resumed in late December. - Potential economic impact of disruption: - To date, "there has not been any impact on copper production." - Estimated impacts of a one quarter suspension (using INDESA estimates): - Would "reduce annual GDP growth by 0.8 percentage point." - Provinces of "Coclé and Colón would be particularly affected." - Employment and supplier linkages: - Cobre Panamá estimated to provide "around 41 thousand direct and indirect jobs and interact with 1,800 suppliers." ### Fund relations, data, and institutional notes (selected statistics) - IMF membership and quota: - Quota "376.80" (SDR Million) representing "100.00 percent of Quota." - Fund holdings of currency "699.20" (185.56 percent of Quota). - Reserve Tranche Position "54.41" (14.44 percent). - Recent financing and outstanding arrangements: - PLL approval: "Jan 19, 2021" to "January 18, 2023" for "1,884.00" (amount approved); amount drawn "0." - RFI: Date of commitment "April 15, 2020"; Date drawn "May 15, 2020"; Amount approved and drawn "376.80." - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: "2023 94.20", "2024 188.40", "2025 94.20" - Charges/Interest: "16.85", "11.20", "4.20", "2.62", "2.62" - Totals (presented in source): "111.05", "199.60", "98.40", "2.62", "2.62" - Exchange rate arrangement: - "Panama uses the U.S. dollar as the primary means of payment"; "balboa is issued in the form of coins only"; exchange rate fixed at "1 balboa per U.S. dollar." - Data adequacy and national accounts notes: - Real sector data: quarterly production-approach GDP available until "2022Q3"; expenditure approach until "2021Q4." - CPI base: "2013=100" compiled monthly; CPI rebasing underway (from HIES 2007/08 and HIES 2017/18 noted). *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1panea2023002.pdf* ### 2021. The producer price index (2016=100) is compiled and published quarterly. In addition, IMF TA has been ### 1panea2023002 - 2021. The producer price index (2016=100) is compiled and published quarterly. In addition, IMF TA has been ### Statistical compilation, coverage, and technical assistance - Producer Price Index (2016=100) is compiled and published quarterly. - IMF technical assistance (TA) provided to develop updated annual and quarterly producer, export, and import price indices, and to support development of annual economic surveys to non-financial enterprises. - National Institute of Statistics and Census (INEC) receiving support from the World Bank to fund TA on national accounts. - The 2023 Census of Population and Dwelling will be conducted from January to March 2023. - Government Finance Statistics (GFS): - Since January 2018 authorities have received regular TA missions and attended regional training workshops from CAPTAC-DR to assist in updating GFS and Public Sector Debt Statistics (PSDS) to best international standards. - FAD provided TA in public accounting, including implementation of government accounting reforms and practical application of IPSAS. - Authorities started publishing information on liabilities derived from turnkey projects and contingent liabilities. - New platform launched for centralized management of public sector financial information: Integración y Soluciones Tecnológicas del Modelo de Gestión Operativa (ISTMO). - Panama reported budgetary central government and local government data time series with annual information from 2014 to 2020 to STA for publication in the GFS database; data are limited to revenue and expenditure with no financing or debt data yet reported. - Panama started publishing fiscal and debt data on a regional database hosted by the Central American Monetary Council (CMCA). - INEC compiles but primary fiscal data are generated within the MOF; MOF and INEC are encouraged to improve coordination. - Some public sector entities excluded from NFPS accounts and public debt: Panama Canal Authority (ACP) and three public enterprises. - More progress expected in improving fiscal tables, including public sector debt data. - Monetary and Financial Statistics: - Panama regularly reports monetary data for depository corporations using SRFs for publication in the International Financial Statistics. - Other financial corporations (OFCs) reported comprise offshore banks, insurance corporations, and pension funds; OFCs data exclude Banco de Desarrollo Agropecuario and Banco Hipotecario Nacional. - Panama reports Financial Soundness Indicators (FSIs) to STA quarterly with data beginning in 2005. - Authorities started using the aggregate housing price index, collected by a contractor. - Data gaps remain: inadequate data on commercial real estate prices, loan write-offs, loan-to-value ratios, and leverage indicators for households and corporates; no mechanism to monitor debtor’s income and value of acquired property after loan origination. - Panama reports several Financial Access Survey (FAS) series, including mobile and internet banking, mobile money, gender-disaggregated data, and the two UN indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) for SDG Target 8.10. - Balance of Payments: - Panama disseminates quarterly balance of payments and international investment position (IIP) data in BPM6 format, with timeliness of about one quarter. - Data are subject to revisions; revised estimates in key trade and investment data may result in substantial revisions to the current account. - Review cycle is predetermined and stable, but not public and causes of revisions are not explained. - Data on outward FDI and repatriation of profit and dividends collected only from the financial private sector. - Official statistics may underestimate inward portfolio investment. - CDIS and CPIS are conducted timely. ### Data standards, ROSC, and dissemination frameworks - Panama has participated in the IMF’s GDDS since December 2000. - With STA assistance, in October 2018 Panama implemented recommendations of the e-GDDS by publishing critical data through the National Summary Data Page (NSDP). - A ROSC – data module was published in October 2006; a follow-up ROSC mission was published in February 2021. - The 2021 ROSC finds Panama has a well-developed macroeconomic statistical system, recognizes the importance of good statistics for policy and investment decisions, and includes recommendations to further adhere to international best practices and enhance analytical usefulness. - The authorities’ National Statistical Plan 2021-25 aims to advance ROSC recommendations and subscribe to the SDDS among other targets. ### Key data/timeliness indicators (as of December 31, 2022) — selected entries from Table 1 - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation 11/2022; Date received 01/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Latest observation 11/2022; Date received 01/2023; Frequency M/M/M. - Broad Money: Latest observation 11/2022; Date received 01/2023; Frequency M/M/M. - National Bank of Panama Balance Sheet: Latest observation 11/2022; Date received 01/2023; Frequency M/M/A. - Consolidated Balance Sheet of the Banking System: Latest observation 11/2022; Date received 01/2023; Frequency M/M/M. - Interest Rates: Latest observation 10/2022; Date received 12/2022; Frequency M/M/M. - Consumer Price Index: Latest observation 12/2022; Date received 01/2023; Frequency M/M/M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest observation 9/2022; Date received 11/2022; Frequency Q/Q/Q. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest observation 9/2022; Date received 11/2022; Frequency Q/Q/Q. - Stocks of Central Government and Central Government-Guaranteed Debt: Latest observation 12/2022; Date received 12/2022; Frequency M/M/M. - External Current Account Balance: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. - Exports and Imports of Goods and Services: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. - GDP/GNP: Latest observation 9/2022; Date received 12/2022; Frequency Q/Q/Q. - Gross External Debt: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. - International Investment Position: Latest observation 6/2022; Date received 1/2023; Frequency Q/Q/Q. - Note: Panama is a fully dollarized economy. ### Recent developments, growth, and outlook (authorities’ statement) - 2022: - Authorities expect Panama's real GDP growth in 2022 at around 9 percent, above staff estimates. - Economic activity for the year expected to have exceeded the level observed in 2019, driven mainly by domestic consumption, trade, and tourism. - Inflation remains lower than regional peers and inflation expectations are well anchored. - Government implemented fuel and food price subsidies to shield vulnerable population from high international food and energy prices. - Authorities will maintain proactive social protection and gradually phase out subsidies in line with fiscal stability objectives. - 2023 outlook: - Authorities expect real GDP growth to reach 5 percent in 2023, in line with staff’s estimates, amid protracted global supply chain disruptions and a slowdown in global trade. - Economic activity to benefit from strong public investment as infrastructure projects gather pace, and steady growth in services, especially tourism. - Authorities plan to implement an update in the GDP base year to reflect pre-pandemic structural changes. ### Fiscal policy, public debt, and revenue administration - Fiscal consolidation: - Authorities maintained fiscal discipline through adherence to the Social and Fiscal Responsibility Law (SFRL), reducing the budget deficit from 10 percent of GDP in 2020 to the 4 percent of GDP threshold in 2022. - 2022 fiscal performance: - Government on track to meet the 4 percent of GDP fiscal deficit target, and between 90 percent and 97 percent of tax revenue goals for 2022. - Tax administration reform: - Creation of the Large Taxpayers Department at the National Tax Service expected to increase tax contributions from larger companies by 4 percent to 9 percent over the next two years. - Large taxpayers account for more than 60 percent of total tax revenue in Panama. - Higher tax collections intended to allow capital investments to be paid with more limited reliance on debt financing. - Public debt: - Public debt remains sustainable; adherence to amended fiscal rule places public debt on a declining path, supported by improved primary fiscal balances and a positive real growth-interest differential. - Only 18 percent of Panama’s public debt is at floating rates. - A recent 2035 bond issued at a coupon of 6.5 percent, 150 bps below regional peers. - Sovereign bonds generally oversubscribed by about 3 times based on recent experience. - Authorities expect to meet next year's financing needs of about US$ 4.1 billion, including US$ 1.9 billion to offset redemptions. ### Financial sector resilience, AML/CFT, and supervisory developments - Banking sector: - Banks remain well capitalized, liquid, and profitable, with only a modest increase in non-performing loans. - Share of pandemic-modified loans fell from 48 percent of total loans at the peak of the pandemic to just 5 percent; about one-third of those considered high-risk accounts. - Most pandemic-modified loans expected to migrate to regular categories soon, as required by a recently-issued banking regulation. - Pass-through of higher interest rates to existing borrowers remains low. - Stress tests suggest banks have adequate capital buffers even under the most adverse scenarios. - AML/CFT and FATF: - Authorities made substantial progress on remaining items of the FATF Action Plan and intensified efforts to exit the gray list in 2023. - Resolutions in investigations and convictions: ten and two high-profile cases, respectively. - Progress made in providing timely information in line with Egmont Group standards; Financial Intelligence Unit working with FINCEN and other international institutions. - Uploading of ultimate beneficial ownership information into new system progressing: universe of companies reduced from over 755 thousand to nearly 235 thousand active entries. - Data uploads now account for 32 percent of total number of companies, a significant increase since October 2022. - Authorities aim to reach a much higher percentage of registered entities by April this year, ahead of the FATF plenary in June. - Supervisory and climate-related regulation: - Superintendency of Banks approved Regulation 11-2022 to address climate risks in the sector. - National Bank of Panama inaugurated its National Climate Risk Management Department and will implement IFC performance standards for financial operations, particularly in agriculture. ### Structural reforms and social insurance - Minera Panama negotiations: - Authorities continue negotiations to find an amicable solution regarding taxes and royalties commensurate with the company's operations; expected to boost exports, employment, and diversification via mining and construction. - Pension system: - Social Security Administration addressing deficit in the pension system. - As of October 2022, current revenues cover only 55 percent of annual pension expenditures. - Shortfall covered by reserves, but reserves expected to be depleted on a cash-flow basis in late 2024 or early 2025. - Authorities reconvened the National Dialogue in January to build consensus to address the issue. ### Climate sustainability initiatives - Panama Canal Authority (ACP) plans to become carbon neutral by 2030 and replace its tugboat fleet with hybrid vehicles. - ACP preparing to spend US$1.5 billion on water management and conservation projects due to decreased rainfall in the Panama Canal basin over the past 20 years. - Financial sector measures: Regulation 11-2022 (Superintendency of Banks) and National Bank of Panama’s National Climate Risk Management Department; implementation of IFC performance standards for financial operations, particularly in agriculture. *Source: IMF staff and authorities’ statements as presented in the provided content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1panea2023002.pdf_