## 1panea2024002-print-pdf

## Source details

**Canonical URL:** [1panea2024002-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1panea2024002-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2024/english/1panea2024002-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2024/english/1panea2024002-print-pdf.pdf.json)

---

### Demographic indicators and labor market dynamics
- Over the last five decades, Panama experienced large secular swings in unemployment rates: between the mid-1970s and the late 1990s unemployment increased from 5 to 15 percent, while in the early 2000s it declined sharply to about 4 percent.
- Labor force and population changes:
  - The number of workers and people in the labor force quadrupled over the last five decades.
  - Panama’s population has quadrupled since the 1960s.
  - The share of the working-age population increased from about 52 percent to 65 percent.
  - Labor force participation increased from 50 percent in the 1980s to 66 percent in 2019.
  - Female labor force participation increased from about 30 percent in the 1970s to over 50 percent in 2019.
  - From the early 1990s, annual net migration was 11 thousand (0.27 percent of the population) by 2018; share of immigrants in the population is around 6 percent per the 2023 census; over 80 percent of those immigrants are working-age adults.

### Unemployment decomposition and empirical findings
- Decomposition framework (variables preserved as in source):
  - 푢푢−푢푢
    ∗
    =
    −
    (
    푦푦−푦푦
    ∗
    )
    +
    (
    푧푧−푧푧
    ∗
    )
    +
    (
    푝푝푝푝푝푝푝푝  −푝푝푝푝푝푝푝푝
    ∗
    )
    +
    (
    푤푤푝푝푝푝−푤푤푝푝푝푝
    ∗
    )
  - In the formula: 푢푢 = unemployment rate; 푦푦, 푧푧, 푝푝푝푝푝푝푝푝, and 푤푤  푝푝푝푝 are the logarithms of GDP, labor productivity, the labor force participation rate and working-age population; * indicates the value at the beginning of the period.
  - Changes in labor demand = output growth minus labor productivity growth.
  - Changes in labor supply = changes in participation rate and working-age population.
- Empirical highlights:
  - Late 1980s: unemployment surged as labor supply surpassed demand due to a rise in the working-age population and labor force participation coupled with a decline in output.
  - Early 2000s: unemployment fell sharply when labor demand picked up driven by strong economic growth, more than compensating increases in working-age population and participation.
  - Labor productivity growth limited unemployment fluctuations (e.g., decline during the 1980s and slowdown during the 2010s).
  - Potential adjustment mechanisms: labor hoarding and changes in informality.

### Sectoral employment shifts and drivers of the 2000s boom
- Structural shifts:
  - Employment moved from agriculture and manufacturing to services (logistics, trade, tourism).
  - The tourism sector’s employment share doubled since 1997.
- Sectoral contributions to employment growth:
  - 1997–2011:
    - Construction: 25%
    - Trade: 18%
    - Logistics: 13%
    - Tourism: 12%
    - Agriculture: 8%
    - Mining: 2%
    - Manufacturing: 1%
    - Other Services: 21%
  - 2011–2019:
    - Non-market sector: 33%
    - Trade: 19%
    - Logistics: 12%
    - Manufacturing: 10%
    - Tourism: 6%
    - Agriculture: 6%
    - Construction: 3%
    - Mining: 1%
    - Other Services: 10%
- Factors supporting the boom: Panama’s role as a trade and logistics hub (Panama Canal and complementary activities) and major construction projects (Canal expansion, airport renovation, skyscrapers).

### Informal sector dynamics
- Cyclical behavior:
  - Informality is counter-cyclical: share of informal jobs drops during strong growth/low unemployment and rises during lower growth/high unemployment.
  - Informal employment absorbs formal workers after shocks, limiting increases in unemployment.
- Trends and magnitudes:
  - Informality rate dropped by about 10 percentage points between 2004 and 2011, to below 40 percent; construction informality fell from 70 to below 50 percent.
  - By 2019 informality had nearly reverted to the 2004 rate despite unemployment remaining much lower.
  - Late 2010s: employment growth mainly in informal jobs, raising informality across sectors.

### Foreign Direct Investment (FDI) and labor market spillovers
- Magnitude and characteristics:
  - Since the economic liberalization reforms of 1996, Panama received average FDI net inflows of over 8 percent of GDP per year.
  - Foreign entities reinvested a large share of earnings; reinvested earnings likely more stable than new equity.
- Sectoral concentration and employment links:
  - Financial intermediation, trade, and logistics attracted about half of FDI inflows; these sectors accounted on average for 35 percent of employment and were responsible for over 50 percent of employment growth during the 2000s.
  - Mining received large investments, though trends expected to change with closing of the copper mine.
- Labor market spillovers: FDI inflows are strongly related to the share of workers employed in large firms and to income per capita; Panama outperforms most countries in the region on these dimensions.

### Convergence, employment-to-population ratio, and productivity implications
- Drivers of convergence (25 years preceding the Pandemic):
  - About three quarters of the reduction in the income differential with the US was driven by an increase in the employment to population rate.
  - One quarter of the reduction was due to faster labor productivity growth.
- Forward-looking findings:
  - The increase in the employment to population ratio is likely to be slower going forward.
  - For income convergence to continue, productivity growth will need to accelerate.
  - Rationale: labor force participation in Panama already exceeds the average in the region and in high-income countries, so further gains from participation are unlikely to provide the same support to growth as in the past.

### Demographic transition and population projections (chart-based indicators preserved)
- Demographic transition largely run its course; population growth projected to keep declining and the share of the working-age population expected to decrease in the next decades.
- Projected population series presented in source for years: 2022, 2026, 2030, 2034, 2038, 2042, 2046, 2050, 2054, 2058, 2062, 2066, 2070, 2074, 2078, 2082, 2086, 2090, 2094, 2098 (percent growth series shown in source chart).
- Age groups shown in source charts: 0-14, 15-64, 65+ (Millions and percent distribution across years 2022–2098).

### Panama’s GHG emissions, energy mix, and climate sensitivity
- Emissions and per capita:
  - Panama’s net GHG emissions are 0.04 percent of global emissions.
  - Per capita net GHG emissions: 3.6 metric tons CO2-eq.
  - Panama is considered one of only three countries in the world whose emissions are "carbon negative" due to forests absorbing more carbon than the country emits.
- Composition of net GHG emissions:
  - Energy sector: 49 percent of GHG emissions in Panama (world average: 72 percent).
  - LULUCF and agriculture: 35 percent of total net GHG emissions in Panama (global average: 13 percent).
- Electricity generation mix (2017–2021 as shown in source charts):
  - Renewable sources account for 65 percent of Panama's electricity; fossil fuels account for about 35 percent of total electricity supply.
  - More than half of Panama’s energy production is from hydropower (NWP, 2022).

### Exposure and sensitivity to climate risks; historical disasters
- Exposure and rankings:
  - Ranked 14th among countries most exposed to multiple hazards based on land area.
  - Ranked 35th among countries with highest percentage of total population at relatively high mortality risk from multiple hazards.
  - 15 percent of total area exposed and 12.5 percent of total population vulnerable to two or more hazards.
- Historical disasters and impacts:
  - Between 1980 and 2020 Panama was struck by 44 natural disasters with total economic damages of about US$381 million and loss of 266 human lives (EM‑DAT).
  - Average temperatures in Panama have increased about 1°C - 3°C since the 1970s (World Bank Group, 2021a).
  - Rising sea levels estimated to affect 2.01 percent of Panama's total land area.

### Canal, ENSO, water challenges, and economic consequences
- ENSO and sectoral reliance:
  - Key climate-sensitive sectors: tourism, construction, transport services, and agriculture.
  - Construction and transport services accounted directly for an estimated 27-55 percent of GDP in the last decade.
  - ENSO can reduce construction and shipping, reduce tourist arrivals, destroy infrastructure, lower agricultural productivity, increase energy prices from hydropower constraints, and affect water availability, biodiversity, and health.
- Panama Canal drought impacts and toll revenue losses:
  - 1997-98 drought: estimated losses of over US$50 million (0.46 percent of GDP).
  - 2015/2016 drought: losses of US$40 million.
  - 2019 drought: ACP reduced daily transits from 32 to 27 and reduced maximum cargo weight, resulting in US$15 million in lost revenues.
  - 2023: driest year on record since 1950; traffic restrictions starting October 2023 and throughout 2024.
    - Average daily transit decreased to as low as 22 vessels per day (ACP Monthly Canal Operations Summary January 2024), a 39 percent reduction in average daily traffic compared to peak daily traffic of 36 vessels observed in 2023.
    - ACP reported a monthly decrease of approximately US$100 million in toll revenues during the initial three months after restrictions were imposed, potentially leading to a total loss of US$700 million (0.8 percent of GDP) during the first semester of the 2024 fiscal year.
    - Staff estimates a total toll revenue shortfall of 0.5 percent of GDP for 2024, assuming: 1) toll revenue growth of 10 percent; 2) an average capacity reduction of 30 percent from January to June 2024; 3) a 15 percent average capacity reduction from July to December.
    - Expected canal return to full capacity in early 2025; economic damages estimated around 0.5 percent of GDP for 2024.
- Canal operations and electricity:
  - ACP’s suspension of hydroelectric generation at Gatún in low-water episodes increased fossil fuel dependence and raised electricity prices, counter to NDC targets.

### Agricultural impacts, fiscal exposure, and water management priorities
- Agricultural insurance and contingent liabilities:
  - 2023 ISA actions: insured around 20 thousand hectares and made payments of about US$3.43 million for agricultural insurance.
  - Drought effects: lower crop production, reduced pasture quality/quantity affecting meat and milk production, increased risk of waterborne diseases in livestock.
  - Insurance payouts highlight potential contingent fiscal liabilities from severe ENSO events.
- Water system vulnerabilities and priority investments:
  - Distribution system loses over 40 percent of transported water due to leakages.
  - Public water fees have remained at a low level since 1982.
  - Recommended investments/priority actions in source:
    - Build a third reservoir.
    - Repair and enhance efficiency of the existing water distribution network.
    - Revise public water fees.
  - ACP is seeking approval for construction of a new reservoir and amendments to Law 20 of 2006; interim water storage and water saving measures are in place.

### Adaptation, mitigation commitments, and fiscal/financial policy guidance
- National Climate Change Policy 2050 (adopted June 8, 2023 by Executive Decree No. 3) objectives:
  1) ensure Panama remains a carbon sink;
  2) transform the economy into one that is resilient and decarbonized;
  3) transition to a net-zero emissions economy;
  4) reduce the climate and social vulnerability of the population.
- NDC targets:
  - Reduce total emissions from the country's energy sector by 24 percent by 2050 (and 11.5 percent by 2030).
  - Restore 50,000 hectares of forest by 2050 nationwide, compared to business as usual.
  - Note: Panama’s first NDCs pledged to reduce total emissions of the energy sector by 12 percent by 2030.
- Policy recommendations highlighted in source:
  - Build structural, financial, and post-disaster resilience through resilient infrastructure, early warning systems, and disaster preparedness.
  - Adopt green Public Financial Management (PFM) practices to include climate priorities in budget preparation, execution, fiscal reporting, oversight, and auditing.
  - Conduct risk assessments that quantify macroeconomic and fiscal impact of climate risks to identify green PFM reform priorities; regularly monitor and assess risk in the budget and budget outturns according to internationally accepted standards.
  - Address transition risks arising from domestic measures and structural changes in foreign economies as global decarbonization advances.

### NDC reforestation target, incentives, and sustainable finance
- Reforestation and incentives:
  - National target: restoration of 50,000 hectares of forest by 2050 nationwide.
  - Government provides financial incentives for reforestation projects and teak plantations.
  - Reforestation projects can participate in Panama’s voluntary carbon market.
  - Panama offers permanent residency visas and citizenship programs for individuals investing at least $100,000 in pre-approved reforestation projects.
- Institutional updates and reporting:
  - Panama is updating its NDC and its National Socioeconomic, Inclusive, Low Emission, and Climate Change Resilient Strategy to 2050.
  - Issuance of the first biennial transparency report to provide an overview of climate action progress.
- Regulatory and market developments:
  - EIA Decree revisions to incorporate vulnerability and climate risk analysis and carbon footprint calculations to evaluate emissions and vulnerability of investment projects.
  - Sustainable Finance Taxonomy officially launched in March 2024 to set criteria for sustainable activities, mobilize private capital, and enhance transparency.
  - National Carbon Market (MNCP) being created by MiAMBIENTE with World Bank and IDB technical assistance.
- International financial support and instruments (preserved figures):
  - World Bank: 2022 US$100 million DPL with Cat DDO; 2023 US$150 million DPL; 2024 second Climate Resilience and Green Growth DPL for US$200 million.
  - IDB: approved a US$400 million Contingent Loan for Natural Disaster and Public Health Emergencies.
  - OPEC Fund and CAF partnership: supported Panama Support Program with a US$440 million loan in 2023 (OPEC Fund US$120 million, CAF US$320 million).
  - Parametric insurance: renewed parametric excess rainfall policy for 2022/2023 with CCRIF SPC.
- Sustainable finance outcomes (reported impacts):
  - Panama led Central America and the Caribbean with 13 green bond issuances in 2022.
  - 2023: BNP issued a certified green bond valued at US$200 million.
  - Commercial bank green financing from IDB Invest in 2023: St. Georges Bank US$10 million; Global Bank Corporation US$100 million.
  - Green Bond Transparency platform reported:
    - 1.7 millions of tCO2e avoided or reduced
    - 3 million Mwh renewable energy generated or used
    - 234 MW installed capacity
    - 626 thousand people benefited from water and wastewater projects
    - 10 thousand M3/h of water treated

### Climate risks to the financial system and capacity building
- Three main exposure channels for financial institutions:
  - Physical risks: vulnerability of assets to natural disasters and climate-sensitive sectors.
  - Transition risks: capital reallocations from high-carbon to low-carbon sectors impairing debt servicing of high-carbon firms.
  - Asset price volatility: from climate change-induced conflicts and migrations.
- Emphasis on building capacity to understand and monitor climate change risks within the financial system to enhance resilience and safeguard financial stability.
- Structural resilience and NAP implementation:
  - National Adaptation Plan project: US$3 million project to enhance planning, governance, and institutional coordination for adaptation; implementation phase with Green Climate Fund support.
  - 2020: “Climate change technical guideline for public investment in infrastructure projects” to incorporate climate risk and resilience criteria.

### Financial safety nets in dollarized economies — stylized facts and policy implications
- Stylized facts:
  - Many dollarized economies are small and highly open with large financial sectors relative to GDP.
  - Strong political/economic links with anchor countries are common but do not guarantee support.
  - Many maintain central bank–like institutions fulfilling central bank functions despite dollarization.
- Deposit insurance systems (DIS):
  - Objectives: reduce probability of bank runs and economic impact of bank failures; requires infrastructure to access deposit databases quickly.
  - Funding approaches: ex ante funding, ex post funding, access to government/central bank financing.
  - Constraints in dollarized economies: inability to issue currency limits financial backstops; DISs rarely can cover the largest banks.
  - Examples: Ecuador’s DIS reserves equivalent to 17 percent of insured bank deposits and 7.5 percent at credit cooperatives (source example).
- Lender of Last Resort (LOLR) and Emergency Liquidity Assistance (ELA):
  - ELA principles: provided at high interest, against adequate collateral, short-term, under strict conditions.
  - Dollarized economies cannot create domestic currency for unlimited ELA; rely on foreign currency assets or borrowing; borrowing in crises can be difficult.
  - Potential liquidity sources: international reserves; reserve requirements; pooled liquidity; credit lines; swap arrangements; government budget; the IMF.
- Policy implications and preventive measures:
  - Resources for crisis management should be identified and secured in good times; public resources as last resort with strong safeguards.
  - Banks’ own buffers are first line of defense; recoveries should prioritize parent-level resolution for international banking groups.
  - Measures to reduce crisis probability: best-practice regulation and supervision (including AML/CFT), fraud risk reduction, sound business models, and managing reputational risks.
  - Measures to reduce crisis costs and enhance resolvability: early intervention, recovery and resolution plans, bail-in instruments, and least-cost resolution frameworks.

### Case studies and jurisdictional examples (selected)
- San Marino:
  - Number of banks rose from 4 to 12 between 2000 and 2008; banking assets grew to 9 times GDP.
  - Deposit outflows in late-2009 / early-2010: deposits dropped by about EUR 3 billion, from almost EUR 8 billion to around EUR 5 billion.
  - By 2015 NPLs reached 140 percent of GDP; GDP declined about 30 percent between 2009 and 2014.
  - CRSM booked a loss in 2016 of EUR 534 million (about 30 percent of GDP); government bailout amounted to 36 percent of GDP; public debt rose from about 20 percent of GDP to over 50 percent following the bailout.
- Isle of Man:
  - DCS is not pre-funded; compensation recovered from surviving banks and the Treasury subject to limits of GBP100 million each over a consecutive 10-year period and GBP200 million for all defaults; no formal LOLR.
- Liechtenstein:
  - 12 banks with total assets under management of CHF 411.4 billion as of end-2022 (about 7,000 percent of GDP).
  - Deposit insurance insures deposits up to CHF100,000; insured deposits CHF 5.3 billion and insured investments CHF 1.5 billion as of end-2022.
  - Banks have access to SNB funding facilities; FMA is Resolution Authority and introduced a bail-in framework.
- Selected dollarized and currency-board economies (preserved figures and arrangements):
  - Kosovo: 12 banks with assets of €7.5 billion and deposits of €6.1 billion as of end-2023; Deposit Insurance Fund insures deposits up to €5,000; ex-ante funded reserves €61.4 million as of end-2022 (about 5.5 percent of insured deposits).
  - Montenegro: 11 banks with assets €6.7 billion and deposits €5.5 billion at end-2023; DPF aims to build reserves equivalent to 10 percent of insured deposits by end-2024; as of end-2021 reserves €117 million vs guaranteed deposits €1.6 billion (coverage ratio 7.1 percent); €50 million EBRD credit line.
  - Guernsey, Jersey, Isle of Man and British Overseas Territories: varied deposit insurance designs, caps, funding approaches, and presence/absence of LOLR as described in source.
  - Pacific island states: many use AUD/NZD/USD; several lack deposit insurance and formal LOLR (examples: Palau, Tuvalu, Kiribati, Cook Islands, Niue, Marshall Islands, FSM); dependence on correspondent banking relations can be a stability concern.

*Source: IMF staff compilation from “1. Demographic Indicators” and related chapter content (May 17, 2024).*

### 1. Demographic Indicators ______________________________________________________________ 6

### 1. Demographic Indicators

### A. Introduction and background
- Over the last five decades, Panama experienced large secular swings in unemployment rates: between the mid-1970s and the late 1990s unemployment increased from 5 to 15 percent, while in the early 2000s it declined sharply to about 4 percent.
- Economic cycles do not fully explain these secular movements; there is a strong negative relationship between GDP growth and changes in the unemployment rate (Okun’s law), but demographic transformations and changes in social norms have also played an important role.

### B. Decomposition of unemployment growth
- Decomposition framework (following Hijzen et al. (2017) and David et al. (2019)):
  - 푢푢−푢푢
    ∗
    =
    −
    (
    푦푦−푦푦
    ∗
    )
    +
    (
    푧푧−푧푧
    ∗
    )
    +
    (
    푝푝푝푝푝푝푝푝  −푝푝푝푝푝푝푝푝
    ∗
    )
    +
    (
    푤푤푝푝푝푝−푤푤푝푝푝푝
    ∗
    )
  - In the formula: 푢푢 is the unemployment rate; 푦푦, 푧푧, 푝푝푝푝푝푝푝푝, and 푤푤  푝푝푝푝 are the logarithms of GDP, labor productivity, the labor force participation rate and working-age population; * indicates the value at the beginning of the period.
  - Changes in labor demand correspond to output growth minus labor productivity growth.
  - Changes in labor supply are captured by changes in the participation rate and working-age population.
- Empirical highlights:
  - Late 1980s: unemployment surged as labor supply surpassed demand due to a rise in the working-age population and labor force participation coupled with a decline in output.
  - Early 2000s: unemployment fell sharply when labor demand picked up driven by strong economic growth, more than compensating increases in working-age population and participation.
  - Labor productivity growth played a key role in limiting unemployment fluctuations (e.g., decline during the 1980s and slowdown during the 2010s).
  - Potential adjustment mechanisms include labor hoarding and changes in informality.

### C. Labor market trends
- Scale of change:
  - Over the last five decades, the number of workers and people in the labor force quadrupled.
- Timing differences:
  - Labor force participation increased from 50 percent in the 1980s to 66 percent in 2019.
  - Employment rate remained flat in the 1980s and 1990s, then rose from about 45 percent to over 60 percent in the last two decades.
- Resulting pattern in unemployment:
  - Unemployment rose during the 1970s and 1980s when participation rose and employment remained flat.
  - Unemployment remained stable during the 1990s when participation and employment grew together.
  - Unemployment declined rapidly between the late 1990s and early 2010s when employment growth outpaced participation growth.

### D. Labor force — the role of demographics and social norms
- Population and composition changes:
  - Since the 1960s, Panama’s population has quadrupled.
  - The share of the working-age population increased from about 52 percent to 65 percent.
- Drivers of labor force growth:
  - The contribution of population growth declined over time; the contribution of labor force participation growth increased.
  - Female labor force participation increased from about 30 percent in the 1970s to over 50 percent in 2019, sharply reducing but not closing the gender gap in labor participation.
- Migration:
  - From early 1990s, immigration increased; by 2018 annual net migration was 11 thousand (0.27 percent of the population).
  - Share of immigrants in the population almost doubled since 1990 and is currently at around 6 percent of the population according to the 2023 census.
  - Over 80 percent of those immigrants are working-age adults.

### E. Dissecting the employment boom of the 2000s
- Structural shifts in employment:
  - Employment moved from agriculture and manufacturing to services (logistics, trade, tourism).
  - The tourism sector’s employment share doubled since 1997.
- Sectoral drivers of employment growth (1997–2011):
  - Construction: 25%
  - Trade: 18%
  - Logistics: 13%
  - Tourism: 12%
  - Agriculture: 8%
  - Mining: 2%
  - Manufacturing: 1%
  - Other Services: 21%
- Sectoral drivers of employment growth (2011–2019):
  - Non-market sector: 33%
  - Trade: 19%
  - Logistics: 12%
  - Manufacturing: 10%
  - Tourism: 6%
  - Agriculture: 6%
  - Construction: 3%
  - Mining: 1%
  - Other Services: 10%
- Specific factors supporting the 2000s boom:
  - Role as a trade and logistics hub (e.g., the Panama Canal and complementary activities).
  - Major construction projects: expansion of the Canal, airport renovation, construction of large skyscrapers.

### F. The informal sector
- Cyclical behavior:
  - Informality rates display counter-cyclical behavior: during strong growth and low unemployment the share of informal jobs drops; during lower growth and high unemployment the share rises.
  - Informal employment acts as a buffer to absorb formal workers after shocks, limiting increases in unemployment.
- Trends:
  - Informality rate dropped by about 10 percentage points between 2004 and 2011, to below 40 percent; decline occurred across all sectors (construction informality fell from 70 to below 50 percent).
  - By 2019 informality had nearly reverted to the 2004 rate despite unemployment remaining much lower.
  - Late 2010s: employment growth was mainly in informal jobs, driving informality rates up in all sectors; informal employment increased as output growth decelerated, likely absorbing dismissed formal workers and new entrants.

### G. The role of foreign direct investment (FDI)
- Magnitude:
  - Since the economic liberalization reforms of 1996, Panama received average FDI net inflows of over 8 percent of GDP per year.
- Characteristics:
  - Foreign entities reinvested a large share of their earnings in the economy.
  - Reinvested earnings are likely a more stable source of FDI than new equity.
- Labor market spillovers:
  - FDI inflows are strongly related to the share of workers employed in large firms and to income per capita.
  - Panama outperforms most countries in the region on these dimensions.
- Sectoral concentration:
  - Financial intermediation, trade, and logistics attracted about half of FDI inflows; these sectors accounted on average for 35 percent of employment and were responsible for over 50 percent of employment growth during the 2000s.
  - Mining also received large investments, though trends are expected to change with the closing of the copper mine.

### H. Sustaining economic convergence
- Drivers of convergence (25 years preceding the Pandemic):
  - About three quarters of the reduction in the income differential with the US was driven by an increase in the employment to population rate.
  - One quarter of the reduction was due to faster labor productivity growth.
- Implication:
  - The increase in the employment rate was driven by the booming economy, population growth, a higher ratio of working-age adults, and greater labor force participation.

*Source: IMF staff compilation from “1. Demographic Indicators” (May 17, 2024).*

### 22.      Going forward, the increase in the employment to population ratio is likely to be

### 22.      Going forward, the increase in the employment to population ratio is likely to be 

### Employment, productivity, and convergence
- Finding: The increase in the employment to population ratio is likely to be slower going forward.
- Implication: For income convergence to continue, productivity growth will need to accelerate.
- Rationale: Labor force participation in Panama already exceeds the average in the region and in high-income countries, so further gains from labor force participation are unlikely to provide the same support to growth as in the past.

### Demographic transition and population projections
- Finding: The demographic transition has largely run its course; population growth is projected to keep declining and the share of the working-age population is expected to decrease in the next decades.
- Projected population by age group (key chart indicators preserved from source):
  - Age groups shown: 0-14, 15-64, 65+ (Millions and percent distribution across years 2022–2098 as in source charts).
- Projected population growth series presented for years 2022, 2026, 2030, 2034, 2038, 2042, 2046, 2050, 2054, 2058, 2062, 2066, 2070, 2074, 2078, 2082, 2086, 2090, 2094, 2098 (percent growth series shown in source chart).

### Foreign Direct Investment by sector (chart summary)
- Sectoral shares presented for years 2006, 2012, 2019 in source:
  - Sectors listed in chart: Financial intermediation; Wholesale and retail trade; Transport, storage, and communication; Construction; Manufacturing; Other; Mining and quarrying operations.
  - Example values visible in chart captions: 2019: 21%, 29%, 16%, 4%, 5%, 10%, 15%; 2012: 24%, 31%, 17%, 4%, 6%, 14%, 4%; 2006: 35%, 20%, 20%, 7%, 6%, 12%, (other percentages as in source chart).

### Panama’s greenhouse gas (GHG) emissions and energy composition
- Panama’s net GHG emissions are 0.04 percent of global emissions.
- Per capita net GHG emissions: 3.6 metric tons CO2-eq.
- Panama is considered one of only three countries in the world whose emissions are "carbon negative" due to forests absorbing more carbon than the country emits.
- Composition of net GHG emissions:
  - Energy sector: 49 percent of GHG emissions in Panama (world average: 72 percent).
  - Land Use, Land-Use Change, and Forestry (LULUCF) and agriculture: 35 percent of total net GHG emissions in Panama (global average: 13 percent).
- Electricity generation mix (chart series 2017–2021):
  - Hydropower, Fossil, Wind and Solar, Bioenergy (percent of total generation as shown in source chart).
  - Renewable sources account for 65 percent of Panama's electricity; fossil fuels account for about 35 percent of total electricity supply.
  - More than half of Panama’s energy production is from hydropower (NWP, 2022).

### Exposure and sensitivity to climate change risks
- Finding: Panama contributes little to global climate change but is highly sensitive to climate change risks and sensitivity is expected to increase.
- World Bank rankings and exposures:
  - Ranked 14th among countries most exposed to multiple hazards based on land area.
  - Ranked 35th among countries with highest percentage of total population at relatively high mortality risk from multiple hazards.
  - 15 percent of total area exposed and 12.5 percent of total population vulnerable to two or more hazards.
- Historical observations:
  - Between 1980 and 2020 Panama was struck by 44 natural disasters with total economic damages of about US$381 million and loss of 266 human lives (EM‑DAT).
  - Average temperatures in Panama have increased about 1°C - 3°C since the 1970s (World Bank Group, 2021a).
- Rising sea levels are estimated to affect 2.01 percent of Panama's total land area.

### Reliance on climate-sensitive sectors and ENSO impacts
- Key sectors sensitive to climate change: tourism, construction, transport services, and agriculture.
- Construction and transport services accounted directly for an estimated 27-55 percent of GDP in the last decade (source statement).
- ENSO impacts (El Niño and La Niña) can:
  - Reduce construction and shipping activity, reduce tourist arrivals, destroy properties and infrastructure, and adversely impact other sectors.
  - Lead to lower agricultural productivity, higher energy prices from hydropower constraints, and adverse effects on water availability, biodiversity, and health.

### Water challenges, Panama Canal impacts, and economic consequences
- Droughts are a major challenge: depletion of Gatún Lake and Alajuela Lake affects Panama Canal operations.
- Historical drought impacts:
  - 1997-98 drought estimated losses of over US$50 million (0.46 percent of GDP).
  - 2015/2016 drought led to losses of US$40 million.
  - 2019 drought: ACP reduced daily transits from 32 to 27 and reduced maximum cargo weight, resulting in US$15 million in lost revenues.
- 2023 was the driest year on record (since records started in 1950); disruptions led to traffic restrictions starting October 2023 and throughout 2024.
  - Average daily transit decreased to as low as 22 vessels per day (ACP Monthly Canal Operations Summary January 2024), representing a 39 percent reduction in average daily traffic compared to the peak daily traffic of 36 vessels observed in 2023.
  - ACP reported a monthly decrease of approximately US$100 million in toll revenues during the initial three months after restrictions were imposed, potentially leading to a total loss of US$700 million (0.8 percent of GDP) during the first semester of the 2024 fiscal year.
  - Staff estimates a total toll revenue shortfall of 0.5 percent of GDP for 2024, assuming: 1) toll revenue growth of 10 percent; 2) an average capacity reduction of 30 percent from January to June 2024; 3) a 15 percent average capacity reduction from July to December.
  - It is expected that the canal will return to full capacity in early 2025, with economic damages estimated around 0.5 percent of GDP for 2024.
- Canal operations and electricity generation:
  - ACP’s suspension of hydroelectric generation at Gatún in episodes of low water increased dependence on fossil fuels and raised electricity prices, counter to NDC targets.

### Agricultural impacts and fiscal exposure
- 2023 ISA actions: insured around 20 thousand hectares and made payments of about US$3.43 million for agricultural insurance.
- Drought effects: lower crop production, reduced quality/quantity of pastureland affecting meat and milk production, increased risk of waterborne diseases in livestock.
- Contingent liability: insurance payouts highlight potential contingent fiscal liabilities from severe ENSO events.

### Water resource management priorities and infrastructure needs
- Panama depends heavily on water resources for agriculture, energy, transit through the Canal, and households.
- Systemic issues:
  - Distribution system loses over 40 percent of transported water due to leakages.
  - Public water fees have remained at a low level since 1982.
- Recommended investments/priority actions noted in source:
  - Build a third reservoir.
  - Repair and enhance efficiency of the existing water distribution network.
  - Revise public water fees.
  - ACP is seeking approval for construction of a new reservoir and amendments to Law 20 of 2006; in the interim water storage and water saving measures are in place.

### Adaptation, mitigation commitments, and fiscal/financial policy guidance
- National Climate Change Policy 2050 (adopted June 8, 2023 by Executive Decree No. 3) aims to:
  1) ensure Panama remains a carbon sink;
  2) transform the economy into one that is resilient and decarbonized;
  3) transition to a net-zero emissions economy;
  4) reduce the climate and social vulnerability of the population.
- Panama’s NDC targets:
  - Reduce total emissions from the country's energy sector by 24 percent by 2050 (and 11.5 percent by 2030).
  - Restore 50,000 hectares of forest by 2050 nationwide, compared to business as usual.
  - Note: In Panama’s first NDCs it pledged to reduce total emissions of the energy sector by 12 percent by 2030.
- Policy recommendations and priorities highlighted in the source:
  - Build structural, financial, and post-disaster resilience through resilient infrastructure, early warning systems, and disaster preparedness.
  - Adopt green Public Financial Management (PFM) practices to include climate priorities in budget preparation, execution, fiscal reporting, oversight, and auditing.
  - Conduct risk assessments that quantify macroeconomic and fiscal impact of climate risks to identify green PFM reform priorities; regularly monitor and assess risk in the budget and budget outturns according to internationally accepted standards.
  - Address transition risks arising from domestic measures and structural changes in foreign economies as global decarbonization advances.

*Source: IMF staff report content as provided in the supplied PDF chapter/section.*

### 13.      Panama’s NDCs target the restoration of 50,000 hectares of forest by 2050 nationwide.

### 13.      Panama’s NDCs target the restoration of 50,000 hectares of forest by 2050 nationwide.

### NDC targets and reforestation incentives
- National target: restoration of 50,000 hectares of forest by 2050 nationwide.
- Financial incentives and investor incentives:
  - Government provides financial incentives for investments in reforestation projects and to teak plantations.
  - Reforestation projects will be able to participate in Panama’s voluntary carbon market.
  - Panama is offering permanent residency visas and citizenship programs for individuals investing at least $100,000 in pre-approved reforestation projects.

### NDC update and strategic planning
- Panama is updating:
  - its NDC, and
  - its National Socioeconomic, Inclusive, Low Emission, and Climate Change Resilient Strategy to 2050.
- Complementary reporting: issuance of the first biennial transparency report to:
  - provide a comprehensive overview of climate action progress,
  - steer the nation's vision toward inclusive economic development,
  - decrease emissions, enhance resilience, and promote social welfare.

### Regulatory enhancements for climate risk and project evaluation
- Environmental Impact Assessment (EIA) Decree revisions:
  - incorporate vulnerability and climate risk analysis,
  - include carbon footprint calculations.
- These updates enable:
  - evaluation of emissions from public and private investment projects,
  - identification of mitigation measures,
  - assessment of project vulnerability.

### Financial resilience — international financial support and instruments
- World Bank support:
  - 2022: approved a US$100 million Development Policy Loan (DPL) with Catastrophe Deferred Drawdown Option (Cat DDO).
  - 2023: approved a US$150 million DPL to support sustainable growth and climate resilience.
  - 2024: approved a second Climate Resilience and Green Growth DPL for US$200 million.
- IDB support:
  - approved a US$400 million Contingent Loan for Natural Disaster and Public Health Emergencies.
- OPEC Fund and CAF partnership:
  - supported the "Panama Support Program for the National Climate Change Policy" with a US$440 million loan in 2023 (OPEC Fund contributed a US$120 million loan, while CAF pledged US$320 million).
- Parametric insurance:
  - Panama renewed parametric excess rainfall policy for 2022/2023 with Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC).

### Sustainable finance market progress and impacts
- Green bond market:
  - Panama led Central America and the Caribbean with 13 issuances in 2022.
  - 2023: BNP issued a certified green bond valued at US$200 million.
- Commercial bank green financing from IDB Invest in 2023:
  - St. Georges Bank obtained a US$10 million loan.
  - Global Bank Corporation obtained a US$100 million loan.
- Green investment impacts (Green Bond Transparency platform):
  - 1.7 millions of tCO2e avoided or reduced
  - 3 million Mwh renewable energy generated or used
  - 234 MW installed capacity
  - 626 thousand people benefited from water and wastewater projects
  - 10 thousand M3/h of water treated

### Sustainable Finance Taxonomy and carbon market development
- Sustainable Finance Taxonomy:
  - Officially launched in March 2024.
  - Purpose: set criteria for identifying economic activities that facilitate the transition to a sustainable, resilient, and inclusive economy; mobilize private capital; enhance market transparency; strengthen financial flow monitoring; design policies promoting investments in key sectors.
- National Carbon Market (MNCP):
  - Ministry of the Environment (MiAMBIENTE) is creating and implementing the MNCP to facilitate exchange of emission credits among companies, governments, and organizations.
  - Development has benefited from collaboration and technical assistance from the World Bank and IDB.

### Climate risks to the financial system and capacity building
- Three main exposure channels for financial institutions:
  - Physical risks: vulnerability of assets to natural disasters and sectors sensitive to climate change.
  - Transition risks: decarbonization leading to capital reallocations from high-carbon to low-carbon sectors, potentially impairing high-carbon companies' debt servicing.
  - Asset price volatility: resulting from climate change-induced conflicts and migrations (World Bank, 2021 reference).
- Emphasis on building capacity to understand and monitor climate change risks within the financial system to enhance resilience and safeguard financial stability.

### Structural resilience: settlements and infrastructure
- Human settlements:
  - Local initiatives: Panama City participated in the “100 Resilient Cities Program” (2016) and created an action plan; some municipalities joined the “Global Covenant of Mayors for Climate and Energy”.
  - National Adaptation Plan (NAP) will expand local efforts and integrate climate measures into land use and urban planning regulations, reinforcing mandatory environmental guidelines nationwide.
- Infrastructure:
  - 2020: government developed the “Climate change technical guideline for public investment in infrastructure projects” to incorporate climate risk and resilience criteria.
  - The NAP includes development of an adaptation plan for infrastructure; potential elements may involve sustainable transport and e-mobility.

### Post-disaster resilience and NAP implementation
- National Adaptation Plan project:
  - US$3 million project to enhance planning, governance, and institutional coordination for adaptation.
  - Aims to build institutional capacity for climate risk and vulnerability assessment and facilitate planning in priority sectors: water resources, agriculture and food security, infrastructure, human settlements, and health.
  - Project is in the implementation phase with active involvement of government agencies and support from the Green Climate Fund.

*Source: Excerpt from IMF country report chapter on Panama’s climate action, reforestation, finance, and adaptation measures.*

### 9.      Although these dollarized economies are quite diverse, there are common traits

### 9. Although these dollarized economies are quite diverse, there are common traits among subgroups of them

### Stylized facts of dollarized economies
- Size and scale
  - Many are small economies. The smallest economies in the world are typically dollarized. Vatican City: surface area of 49 hectares and a population of 764 people.
  - The smallest country with its own currency and monetary policy is Tonga, with a population of about 100,000 people and GDP of just over US$0.5 billion.
  - Followed by the Seychelles (population around 100,000 and GDP of about US$1.5 billion) and Vanuatu (population around 300,000 and GDP of about US$1.0 billion).
  - Issuing a currency and maintaining an independent monetary policy requires a certain scale and capabilities.
- Political and economic links
  - Many dollarized economies have strong political, economic and military links with other countries, often neighboring countries and/or the anchor country.
  - Links do not always coincide with political ties (example: British Overseas Territories in the Caribbean are politically linked to the UK but have the US dollar as anchor currency; Hong Kong SAR and Macao SAR are part of China but also have the US dollar as anchor currency).
- Openness and financial structure
  - Most are open economies, both in terms of trade and capital flows.
  - Many have large financial sectors relative to their economies, with assets that are often high multiples of GDP, and are net exporters of financial services.
  - Some international financial centers separate onshore from offshore banking, with the latter having some or all of specific licenses, regulatory and legislative frameworks, financial stability arrangements, and taxation regimes.
  - Financial sectors are often not very diversified; some economies (e.g., Andorra) have just a few large institutions.
- Central bank presence
  - Many dollarized economies have a central bank or a similar institution that fulfills central bank functions.
  - Examples: Ecuador and El Salvador abolished their currency but not their central bank. Montenegro established a central bank in 2001, Kosovo in 2008, Timor Leste in 2011. Marshall Islands is considering establishing one.

### Deposit Insurance: objectives, constraints, and practice
- Objectives and infrastructure
  - Deposit insurance aims to reduce the probability of bank runs and the economic impact of bank failures by guaranteeing deposits up to a certain level and providing quick access to insured deposits.
  - Requires infrastructure (notably IT and interlinkages) to quickly access and/or take over a bank’s deposit databases.
- Funding and resources
  - Deposit insurance requires resources to be credible. Common funding approaches:
    - Ex ante funding: build up funds through regular fees paid by banks.
    - Ex post funding: impose levies on surviving banks after a bank failure.
    - Access to financing from government and/or central bank (acting with government backing) for rapid mobilization in crises.
  - Operational costs exist even if no pay-outs occur.
  - Banks may resist fees, viewing them as a tax or cross-subsidy; systemic, foreign-owned, and state-owned banks may see limited benefit.
- Constraints specific to dollarized economies
  - Inability to issue currency limits ability to provide a financial backstop; must rely on readily available assets or borrowing, which may be constrained in a crisis.
  - Deposit insurance carries moral hazard risks for depositors and banks; risk can be mitigated through proper DIS design and strong regulation and supervision.
- Functions and capacities of DISs
  - DISs can range from a simple “pay-box function” to taking on crisis management, administration, liquidation, or acting as resolution agent.
  - Some DISs can provide resolution financing (temporary funding to facilitate resolution).
  - Of dollarized economies surveyed, exceptions without a DIS include: the Cayman Islands, the Marshall Islands, Palau, the Turks and Caicos Islands, Timor-Leste, Vatican City, Tuvalu, Kiribati, the Cook Islands and Niue.
  - Monaco: no own DIS, but banks licensed in Monaco must be licensed by the French bank regulator and are part of the French financial safety net, including deposit insurance and resolution arrangements. The Federated States of Micronesia: the domestic bank is supervised and insured by the FDIC.
  - There has been a trend toward introducing DISs globally and among dollarized economies; three decades ago almost none had DISs, now most do.
  - DISs rarely have capacity to cover the failure of the largest banks. Example of reserves: Ecuador’s DIS has accumulated reserves equivalent to 17 percent of insured bank deposits and 7.5 percent of insured deposits at credit cooperatives.
  - Some DISs set an overall cap on pay-outs; if insured losses exceed the cap, depositors may be compensated proportionally.

### Lender of Last Resort (LOLR) and Emergency Liquidity Assistance (ELA)
- Definition
  - Emergency Liquidity Assistance (ELA) = The provision of liquidity as a last resort to solvent and viable banks facing temporary liquidity stress, outside of normal monetary policy operations, to preserve financial stability.
- Principles for ELA
  - Ideally provided at a high interest rate, against adequate collateral, for a relatively short time, and under strict conditions.
  - In practice, ELA has sometimes been provided without adequate collateral or to banks of doubtful solvency, putting public finances at risk.
  - ELA should be distinguished from regular central bank liquidity facilities, but this is not always done.
- Transparency and constructive ambiguity
  - There is less transparency about LOLR arrangements than about deposit insurance; regulators may maintain “constructive ambiguity” about ELA availability to reduce moral hazard.
- Resource constraints in dollarized economies
  - Dollarized economies cannot create domestic currency and therefore cannot provide unlimited ELA; foreign currency availability (existing assets or borrowing) constrains ELA provision.
  - Borrowing during financial stress can be particularly difficult; fiscal resources are often needed to mobilize foreign currency.
  - These constraints increase the importance of strict ELA conditions and agreed funding plans.
- Examples of LOLR-like arrangements in dollarized economies
  - El Salvador: central bank reserve requirements and international reserves can be used to provide liquidity; credit line from the Central American Bank for Economic Integration (CABEI) for providing liquidity.
  - Ecuador: central bank does not offer liquidity facilities or ELA. Banks pool part of their liquidity (currently amounting to 3 percent of assets) in a private liquidity fund that banks can borrow from subject to conditions. The central bank has access to liquidity facilities with the Federal Reserve Bank of New York, the BIS, and the Latin American Reserve Fund (FLAR).
  - Andorra: building up international reserves and recently became an IMF member to have access to resources to support its banking system.
  - Liechtenstein: banks have access to Swiss National Bank (SNB) liquidity facilities, though extension to ELA is unclear; Liechtenstein is seeking IMF membership to access additional resources.
  - San Marino: central bank reserve requirements and international reserves form a pool of foreign currency usable for liquidity provision.
- Potential liquidity sources for LOLR-like facilities
  - International reserves
  - Reserve requirements
  - Pooled liquidity
  - Credit lines
  - Swap arrangements
  - The government budget (directly or indirectly, as a guarantor)
  - The IMF

### Bank failures in dollarized economies: incidence and lessons
- Incidence
  - Bank failures in dollarized economies are relatively rare; possible reasons include banks adapting to safety-net limitations, more prudent behavior, and many banks being part of international banking groups able to support orderly exits.
- Selected case lessons
  - Caledonian Bank (Cayman Islands)
    - Small bank with international customer base; assets held mostly in the US.
    - Named a defendant in an SEC lawsuit over securities fraud. SEC’s claim was US$7 million and obtained a freeze on the bank’s US assets.
    - Assets were mostly released shortly afterwards, but by then the bank had collapsed due to a run in the absence of deposit insurance and a LOLR; depositors mostly recovered their money through liquidation, but this was slow.
  - TCI Bank (Turks and Caicos Islands)
    - Only home-grown bank; assets about 12 percent of GDP, funded mostly with local deposits.
    - Heavy lending to real estate/tourism; Global Financial Crisis (GFC) led to non-performing loans, crisis of confidence, deposit outflows.
    - In absence of financial safety net and with expected UK bailout not materializing, the bank was liquidated. Depositors recovered about 40 cents on the dollar through liquidation.
  - Banca Privada d’Andorra (BPA)
    - Implicated in the Pandora Papers and named by the US Treasury as “a foreign financial institution of primary money laundering concern”, triggering deposit outflows.
    - Authorities intervened; bank was too large for the Andorran State to save and was liquidated.
    - Solvent “good assets” and “good depositors” (cleared by vetting) were placed in a bridge bank that was sold. Andorra’s deposit insurance was not activated. A special law was adopted to establish a bank resolution agency and resolution regime to enable the bridge bank operation. Spanish and Panamanian subsidiaries were liquidated by host country authorities.
  - BCCI
    - Large international bank registered in Luxembourg with a sister bank in the Cayman Islands; group engaged in extensive fraud using poorly-regulated jurisdictions to escape consolidated supervision.
    - Coordinated interventions in major jurisdictions ensued. Luxembourg’s deposit co-insurance scheme paid partial compensation to Luxembourg depositors; costs recovered through ex-post levies on Luxembourg’s other banks.
    - Vast majority of the estimated around US$10 billion losses occurred in other jurisdictions, many without deposit insurance.
  - Pacific Savings Bank (PSB), Republic of Palau
    - Oldest domestic bank in Palau; failed fraudulently in 2006.
    - In absence of deposit insurance, depositors had to wait until 2010 to start receiving partial compensation.
    - Following this, almost all bank deposits in Palau migrated to branches of FDIC-insured US banks present in Palau.

*Source: IMF staff analysis from the chapter content provided.*

### 26.      At a country level, the experience of San Marino is instructive. San Marino’s banking

### 26.      At a country level, the experience of San Marino is instructive.

### San Marino—history and crisis dynamics
- Banking system expansion and model
  - Between 2000 and 2008, the number of banks in San Marino rose from 4 to 12.
  - The banking system’s assets grew to 9 times GDP.
  - Business model: attract deposits from Italian customers by offering tax advantages and banking secrecy; funds mostly invested in Italian securities.
- Shocks starting in 2008
  - GFC (Global Financial Crisis).
  - A crackdown on tax evasion in Italy and Europe.
  - Critical Moneyval report.
  - Blacklisting by Italy as a tax haven.
  - Grey-listing by the OECD.
  - A tax amnesty in Italy that encouraged the return of money placed abroad.
  - Italian criminal investigations against Sammarinese bank managers.
  - Intervention in Italy’s Delta Group, which was majority-owned by San Marino’s largest bank.
- Deposit outflows and balance sheet effects
  - In late-2009 / early-2010, deposits in the banking system dropped by about EUR 3 billion, from almost EUR 8 billion to around EUR 5 billion.
  - Banks coped with outflows by selling holdings of Italian securities.
  - Non-resident bank deposits declined by 60 percent during 2009-2011.
  - By 2015, over half the loan portfolio to customers was non-performing.
  - The stock of NPLs reached 140 percent of GDP.
- Economic and fiscal consequences
  - The banking crisis triggered a deep economic crisis, with GDP declining about 30 percent between 2009 and 2014.
  - San Marino’s GDP had still not recovered to its 2009 level (as of the account in the source).
  - The largest and oldest bank, Cassa di Risparmio della Republica di San Marino (CRSM), had invested heavily in the Italian Delta Group, which failed fraudulently; CRSM was eventually bailed out by the Sammarinese State, resulting in a large increase in government debt.

### F. Conclusions — financial safety nets in dollarized economies
- Fundamental constraint
  - The inability to issue currency is a binding resource constraint for dollarized economies when designing DISs and LOLR arrangements.
- Typical arrangements and limitations
  - Most dollarized economies have a limited DIS and maintain options to provide some support to banks if needed.
  - These arrangements offer benefits but cannot overcome the core constraint of not being able to issue currency.
- Resource planning and prioritization
  - Resources for dealing with a financial crisis need to be identified and secured in good times.
  - Ideally, resources should be sufficiently large to deal with plausible crisis scenarios, considering the size of the financial system and the largest banks, but this may not be possible for dollarized economies.
  - Public resources should be a last resort and used only with strong safeguards.
- Layered defenses and where responsibility lies
  - Banks’ own liquidity and solvency buffers are the first line of defense.
  - Banks that are part of international banking groups should be dealt with at the parent level first; host countries should not be expected to support subsidiaries of international banks.
  - Potential sources of funds include pooled liquidity from banks, international credit lines, fiscal buffers, and IMF facilities.

### Policy implications when large banks fail in dollarized economies
- Limited options and external assistance
  - When faced with the failure of a large bank, dollarized economies often have limited options; rescuing a systemic bank may not be possible.
  - Close ties with other economies (including the anchor country) cannot be counted on to produce outside help.
- Higher and specific fiscal risks
  - Dollarized economies face higher and specific risks of banking problems resulting in long-term damage to public finances.
  - This supports adopting policies and frameworks that reduce the probability and cost of potential bank failures.

### Causes of banking problems and preventive measures
- Non-financial drivers of crises
  - Banking problems often result not from poor financials alone, but from legal, AML/CFT, fraud, or reputational problems.
- Measures to reduce crisis probability
  - Best-practice regulation and supervision, including on AML/CFT.
  - Measures that reduce the risk of fraud.
  - Ensuring banks have sound and sustainable business models.
  - Maintaining constructive relations with partner countries (in particular, the anchor country) and managing reputational risks.

### Measures to reduce crisis costs and enhance resolvability
- Early intervention and planning
  - Early intervention to act while a troubled bank still has positive value.
  - Recovery and resolution plans to facilitate recovery or orderly wind-down of banks.
- Loss-absorbing and resolution tools
  - Bail-in instruments can absorb losses.
  - An efficient “least-cost” resolution framework can help maximize the recovery value of a failed bank.

*International Monetary Fund — content unit extracted from the source text.*

### 14.      As a result, the banking system shrunk substantially. The number of banks declined from

### 1panea2024002-print-pdf - 14.      As a result, the banking system shrunk substantially. The number of banks declined from

### Banking system contraction and San Marino case
- Number of banks declined from 12 to four.
- Banking system total assets decreased from about EUR 11.5 billion at end-June 2009 (equivalent to 9 times GDP) to just over EUR 4 billion at end-2022.
- Decline driven by the departure of non-resident depositors and non-resident bank owners; of the remaining four banks, only one is majority foreign-owned.
- San Marino: Cassa di Risparmio della Repubblica di San Marino (CRSM) had assets equivalent to 300 percent of GDP at end-2009.
- CRSM booked a loss in 2016 amounting to EUR 534 million (equivalent to about 30 percent of San Marino’s GDP).
- Government bailout of CRSM amounted to an amount equivalent to 36 percent of GDP; loss was allowed to be spread over 25 years.
- Public debt rose from about 20 percent of GDP to over 50 percent following the bailout.

### Monaco and Vatican City institutional arrangements
- Monaco:
  - Monégasque banking system: 15 branches of foreign banks and 12 locally-registered credit institutions.
  - Credit institutions in Monaco require licensing by CCAF and by the French bank regulator ACPR.
  - Members of the French deposit insurance system Fonds de Garantie des Dépôts et de Résolution (FGDR).
  - ACPR is the resolution authority.
- Vatican City:
  - One bank-like financial institution: Institute for the Works of Religion (IOR).
  - IOR assets of EUR2.8 billion and deposits of EUR1.8 billion as of end-2022.
  - Financial regulator established in 2010: Supervisory and Financial Information Authority (ASIF).
  - No deposit insurance or lender of last resort (LOLR) in Vatican City.

### Liechtenstein: structure, coverage, and limits
- Currency and monetary policy:
  - Officially adopted the Swiss Franc (CHF); monetary policy conducted by the Swiss National Bank (SNB).
  - Member of EEA and EFTA; no central bank; Liechtensteinische Landesbank AG (majority State-owned) fulfills certain State tasks.
- Banking sector size and role:
  - 12 banks with total assets under management of CHF 411.4 billion (about 7,000 percent of GDP) as of end-2022.
  - Financial sector estimated to contribute about 21 percent to GDP.
- Deposit insurance:
  - Deposit insurance provided by Deposit Guarantee and Investor Compensation Foundation PCC (Einlagensicherungs- und Anlegerentschädigungs-Stiftung SV, EAS).
  - Insures deposits up to CHF100,000 and investor claims up to CHF30,000.
  - As of end-2022: insured deposits amounted to CHF 5.3 billion and insured investments to CHF 1.5 billion.
  - Foundation set up as a core and four cells; no liability between the cells.
  - If funds insufficient, EAS can borrow or issue a special levy; accumulated ex-ante funds are small.
- LOLR and resolution:
  - Banks have access to SNB funding facilities on same terms as Swiss banks, but SNB guidelines suggest possible restriction of access to ELA; thus no full-fledged LOLR in Liechtenstein.
  - FMA is the Resolution Authority and has introduced a bail-in framework.
  - EAS was activated in March 2024 for the bankruptcy of Sora Bank.

### Other Europe: Luxembourg, Bosnia and Herzegovina, Bulgaria, Kosovo, Montenegro
- Luxembourg:
  - Prior to euro, monetary union with Belgium; no LOLR and no deposit insurance initially.
  - 1993 private co-insurance (AGDL) covered up to 90 percent of insured deposits (10 percent bearer loss), levied fees ex post.
  - AGDL payouts: BCCI in 1995 and Luxembourg subsidiaries of three Icelandic banks in 2008 (EUR 310 million).
  - Coverage increased from EUR 22,222 to EUR 100,000 in late-2008; co-insurance abolished but increase did not apply to Icelandic bank depositors.
  - In 2015 AGDL succeeded by Fonds de Garantie des Dépôts Luxembourg (FGDL), a State-run deposit insurance scheme with ex ante funding.
  - Established Institut Monétaire Luxembourgeois in 1983, became Central Bank of Luxembourg and Eurosystem member in 1998.
- Bosnia and Herzegovina (BiH):
  - Maintains a currency board arrangement (CBA) fixed to the euro; Convertible Mark (KM/BAM) rate KM1 = €0,51129.
  - Financial system split between Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS); each has a Banking Agency (FBA and BARS) responsible for regulation, supervision, and resolution.
  - Banking system: 23 banks (15 in FBiH, 9 in RS); assets €42.6 billion and deposits €31.9 billion at end-2023.
  - Deposit insurance: ex-ante funded paybox-type system managed by Deposit Insurance Agency (DIA); covers deposits up to KM70,000 per depositor per bank; can borrow and levy extraordinary fees; reserves usable for resolution funding. EBRD granted a €30 million standby credit line to DIA.
  - 2014 FSAP findings: deficiencies in financial safety net linked to the CBA; CBBH Law disallows granting credit and money market operations “involving securities of any type,” ruling out ELA and standing liquidity facility.
  - FSAP recommendation: create resolution authorities with comprehensive powers, temporary and limited emergency liquidity within CBA, and establish a Financial Stability Fund (FSF) under the DIA for open bank assistance with strict conditions to limit moral hazard and ensure ex-post recovery from banking industry.
- Bulgaria:
  - Adopted a CBA on July 1, 1997; Lev (BGN) fixed to Deutsche Mark at 1,000 to 1; redenominated in 1999 to parity with Deutsche Mark; post-euro BGN1 = €0,51129.
  - BNB restricted in LOLR function; could provide ELA only in case of liquidity risk threatening banking system stability.
  - Joined the Banking Union in 2020.
  - Banking system: 17 banks and 6 branches of foreign banks; assets BGN172 billion and deposits BGN147 billion as of end-2023 (equivalent to about 102 and 87 percent of GDP respectively).
  - 2014: Corporate Commercial Bank (Corpbank) lost 20 percent of its deposits in a week due to a bank run; authorities’ actions were contentious relative to liquidity support provided to First Investment Bank.
- Republic of Kosovo:
  - Uses the euro as legal tender; central bank established (Central Bank of Kosovo, CBK).
  - Banking system: 12 banks with assets of €7.5 billion and deposits of €6.1 billion as of end-2023 (equivalent to 76 and 62 percent of GDP respectively).
  - ELA framework:
    - CBK maintains standing lending facilities and an ELA framework; arrangement limited in size and would only assist smaller banks.
    - Central Bank Law limits ELA to total reserves of the CBK and a Special Reserve Fund established by the Treasury that held reserves of €46 million as of 2019.
  - Deposit Insurance Fund of Kosovo established in 2011; insures deposits up to €5,000.
    - Insured deposits amount to €1.11 billion (about 11 percent of GDP).
    - Ex ante funded; reserves amounted to €61.4 million as of end-2022 (about 5.5 percent of insured deposits).
  - Underwent FSAP in 2012 and Financial System Stability Review in 2019.
- Montenegro:
  - Unilaterally adopted the euro; established Central Bank of Montenegro (CBCG) in 2001 responsible for regulation and supervision.
  - Banking system: 11 banks with assets of €6.7 billion and deposits of €5.5 billion at end-2023 (equivalent to about 120 and 100 percent of GDP respectively).
  - Deposit Protection Fund (DPF) established in 2004; insures deposits up to €50,000.
    - By law aims to build reserves equivalent to 10 percent of insured deposits by end-2024.
    - As of end-2021, reserves amounted to €117 million while guaranteed deposits amounted to €1.6 billion (a coverage ratio of 7.1 percent).
    - Moved to risk-based premiums in 2021; base premium rate 1.2 percent of insured deposits.
    - Has a €50 million credit line from the EBRD.
  - CBCG created a Resolution Fund fed by ex-ante contributions aiming to reach reserves equal to one percent of insured deposits; Fund can borrow, tap other financing sources, and levy ex-post fees on banks.
  - In 2019 Invest Banka Montenegro AD Podgorica and Atlas Banka AD Podgorica were intervened and put into bankruptcy; DPF paid out compensation to depositors.

### British Crown Dependencies: Guernsey, Jersey, Isle of Man
- General:
  - Guernsey, Jersey and the Isle of Man issue their own currencies (Guernsey, Jersey and Manx pounds) at par with the British pound, fully backed by British pound reserves in currency board arrangements.
- Guernsey:
  - As of end-2023: 20 banks with total deposits of GBP96 billion and total liabilities of GBP115 billion.
  - Regulated and supervised by Guernsey Financial Service Commission (GFSC).
  - Deposit insurance: Guernsey Banking Deposit Compensation Scheme established in 2008; administrative costs covered by annual fees; no ex ante funding—compensation recovered ex post from member banks through special levies.
  - No formal LOLR.
- Jersey:
  - As of end-2023: 19 banks with total deposits of GBP156.4 billion; none headquartered in Jersey.
  - Regulated and supervised by Jersey Financial Services Commission.
  - Independent bank resolution authority established in 2022: Jersey Resolution Authority (JRA), tasked with developing resolution plans for all banks.
  - Deposit insurance: Jersey Bank Depositors Compensation Board established 2009; coverage GBP50,000 subject to overall cap of GBP100 million in each 5-year period.
    - Not funded ex ante; on activation financed up front through a loan from the State of Jersey and ex post through levies on remaining banks subject to limits.
    - If overall cap of GBP100 million reached, about two thirds recovered from banks with remaining third borne by the State of Jersey.
  - No formal LOLR.
- Isle of Man:
  - As of end-2023: 11 banks with total assets of GBP44.8 billion, funded almost entirely by deposits (GBP43.2 billion).
  - Regulated and supervised by Isle of Man Financial Services Authority (IOMFSA).
  - Since 2021, IOMFSA is also the resolution authority; banks required to prepare recovery plans; IOMFSA required to prepare resolution plans.
  - IOMFSA authorized to establish a resolution fund.

*Source: 1panea2024002-print-pdf - 14.      As a result, the banking system shrunk substantially. The number of banks declined from*

### 40.      The Isle of Man has a deposit insurance scheme, but no LOLR. The Depositors’

### The Isle of Man has a deposit insurance scheme, but no LOLR.

### Isle of Man — Depositors’ Compensation Scheme (DCS)
- The Depositors’ Compensation Scheme (DCS) is to be managed by the IOMFSA and the Isle of Man Treasury when activated.
- The DCS is not pre-funded.
- Compensation payments would be recovered from surviving covered banks and the Treasury, subject to a limit of GBP100 million each over a consecutive 10-year period and GBP200 million for all defaults.
- The IOMFSA warns: “This means that in the event of a very large covered bank failing, or in a systemic crisis, the DCS is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.”
- There is no formal lender of last resort (LOLR) on the Isle of Man.

### British Overseas Territories — Overview and selected jurisdictions

- Bermuda
  - Issues the Bermuda dollar (BMD), pegged at par to the US dollar under a currency board arrangement (CBA).
  - Total banking system assets amounted to BMD24.2 billion in Q3, 2023 or about 4 times GDP.
  - Bermuda Deposit Insurance Corporation (BDIC) insures deposits up to BMD25,000.
  - The BDIC is funded by fees from member banks.
  - There is no lender of last resort in Bermuda.

- British Virgin Islands (BVI)
  - Use the US dollar as legal tender.
  - Offshore financial sector contributed 32.6 percent of GDP in 2022 (down from 40-45 percent in 2002).
  - As of Q3, 2023, there were 7 banks in the BVI; total assets amounted to US$3.11 billion (about 2.5 times GDP) and total deposits to US$2.4 billion.
  - The banking sector has declined from 11 banks in 2002 (total assets US$2.8 billion).
  - The BVI have a limited financial safety net: no crisis management framework and no LOLR (2010 FSAP).
  - The Virgin Islands Deposit Insurance Corporation (VIDIC) was launched in 2023-24.

- Cayman Islands
  - Cayman Islands dollar (CI$) pegged at CI$1.00 = US$1.20 under a CBA; CIMA manages the CBA.
  - Banking presence: 43 of the 50 largest international banking groups present.
  - At end-2022 there were 11 Category A banks and 83 Category B banks, down from 30 and 353 respectively at end-2002.
  - System assets amounted to US$0.51 trillion (down from over US$1.3 trillion at end-2002 and US$1.8 trillion in 2008).
  - The 2009 assessment noted:
    - There is no LOLR facility available within the confines of the currency board arrangement, though experience suggests scope for a limited LOLR funded by excess holdings of international reserves.
    - There is no deposit insurance fund; potential future option to establish one limited to local banks.
    - Resolution tools include powers to appoint a comptroller and ultimately a liquidator.
    - Coordination with home supervisors and participation in supervisory colleges could be further developed.
    - CIMA and other authorities should develop and implement crisis management exercises.

- Gibraltar
  - Issues the Gibraltar pound (GIP) under a CBA fixed at par with the British pound.
  - As of 2024, there are 9 licensed banks in Gibraltar.
  - Gibraltar Financial Services Commission (GFSC) regulates the sector and in 2016 established the Financial Services Resolution and Compensation Committee (FSRCC).
  - Deposit insurance guarantees deposits up to EUR100,000.
  - Resolution Financing Fund had accumulated GIP8.0 million and the Deposit Guarantee Scheme Fund GIP6.6 million as of 2023.
  - The FSRCC aims to establish a 1.8 percent financial reserve by end-2024.
  - Resolution plans have been developed for the banks.

- Turks and Caicos Islands (TCI)
  - Use the US dollar.
  - There are 7 licensed banks, all branches or subsidiaries of international groups.
  - Banking system assets amounted to 248 percent of GDP at end-2022.
  - There is no deposit insurance or LOLR.
  - The local government is subject to a borrowing limit set by the UK.
  - A 2015 FSAP recommended introducing a Special Bank Resolution Regime and recovery and resolution plans before considering a deposit insurance scheme; it also recommended exploring funding alternatives including a Fund with industry participation and access to lines of credit.

### Asia — Selected jurisdictions and features

- Hong Kong SAR
  - Maintains a linked exchange rate regime (CBA) operated by the Hong Kong Monetary Authority (HKMA).
  - Deposit insurance: Hong Kong Deposit Protection Board insures deposits up to HK$500,000.
  - DPS Fund has a target size of 0.25 percent of insured deposits, equivalent to about HK$6.3 billion in 2023.
  - Levies are differentiated based on members’ supervisory ratings.
  - The HKMA acts as LOLR and resolution authority.
  - The Liquidity Facilities Framework (2019) includes a “Contingent Term Facility” (ELA-type) and a “Resolution Facility” to provide liquidity for orderly resolution.
  - The HKMA’s liquidity facilities are governed by circulars posted on its website.
  - Resolution framework updated in 2017 with the Financial Institutions (Resolution) Ordinance (FIRO).

- Macao SAR
  - Macao pataca (MOP) pegged to the Hong Kong dollar at 1.03 patacas per HK$ since 1983 under a currency board arrangement.
  - Macao Monetary Authority (MMA / AMCM) manages the arrangement and oversees banking.
  - The AMCM has an explicit mandate to act as LOLR (spelled out in Art. 5 of its Rules), though no published LOLR policy is apparent.
  - Deposit Guarantee Fund insures deposits up to MOP500,000 (established in 2012, Law No. 9/2012).

- Brunei Darussalam
  - Brunei dollar linked to the Singapore dollar at par through a CBA.
  - Deposit insurance managed by the Brunei Darussalam Deposit Protection Corporation (BDPC), established January 1, 2011.
  - BDPC insures deposits up to BND50,000 and is a paybox-type scheme.

- Timor-Leste
  - Uses the US dollar as official currency; Central Bank of Timor-Leste issues centavo coins (1 centavo = 1 US$ cent).
  - Central bank responsible for banking supervision and manages reserves and the Petroleum Fund.
  - Four of five banks are branches of foreign banks; the fifth is government-owned.
  - There is no deposit insurance and no formal LOLR facility.

### Pacific Island States — Selected observations

- Republic of Palau
  - Uses the US dollar under the Compact of Free Association.
  - Two domestic banks (Asia Pacific Commercial Bank and Palau Investment Bank) and three branches of U.S. banks (Bank of Guam, the Bank of Hawaii, and BankPacific).
  - The U.S. banks are insured by the FDIC and hold over 99 percent of bank deposits in the country.
  - Banks are supervised by the Financial Institutions Commission (FIC).
  - Palau does not have deposit insurance or a formal LOLR; deposits held in the domestic banks are uninsured.
  - Historic failure: Pacific Savings Bank (PSB) failed fraudulently in 2006 with a capital deficit of US$12 million; approximately 7,500 depositors held about US$23 million at the bank.
  - Partial payouts to depositors started only in 2010 using a loan from the government of Taiwan Province of China.
  - Following PSB’s failure, deposits moved largely to FDIC-insured U.S. banks and domestic banking activity contracted.

- Marshall Islands and Federated States of Micronesia
  - Use the US dollar and maintain Compacts of Free Association with the U.S.; the U.S. provides defense, funding grants, and social services.
  - These states kept the US dollar as their official currency after independence.

*Source: IMF staff compilation from the provided content.*

### 65. The Republic of t he Marshall Islands (RMI) became independent in 1979. It concluded a

### The Republic of the Marshall Islands (RMI)

### Banking structure and institutions
- Two privately-owned domestic banks: the Bank of the Marshall Islands and the Pacific Regional Bank (which started operating in 2023).
- A branch of the US-based Bank of Guam operates in RMI.
- A development bank exists: the Marshall Islands Development Bank.

### Regulation, deposit protection, and lender-of-last-resort (LOLR)
- Banks are regulated by the Banking Commission.
- There is no deposit insurance or formal LOLR in the RMI.
- Deposits at the Bank of Guam branch are insured by the FDIC.

### Correspondent banking relations (CBR) and financial stability implications
- The Bank of the Marshall Islands (BOMI) has had difficulties obtaining and retaining correspondent banking relations, in part due to AML/CFT concerns related to the RMI.
- BOMI has been dependent on a single CBR since 2007 and this CBR has been at risk.
- Dependence on a single, at-risk CBR has been a major factor behind the authorities’ decision to explore the possibility of establishing a monetary authority.

*Source: IMF country material on RMI and surrounding Pacific jurisdictions.*

---

### Federated States of Micronesia (FSM)

### Membership, timeline, and banking sector composition
- FSM became independent in 1979.
- FSM concluded a Compact of Free Association with the U.S. in 1986 and became a member of the IMF in 1993.
- Two regulated commercial banks: U.S.-based Bank of Guam and the domestic Bank of the Federated States of Micronesia.
- Both banks are licensed by the Banking Board of the FSM, but are supervised and insured by the US FDIC.

### Financial sector scale and non-regulated institutions
- Bank deposits amount to about 100 percent of GDP.
- A number of non-regulated (and uninsured) financial institutions exist, including a development bank and credit unions.

*Source: IMF country material on FSM.*

---

### Australian and New Zealand Dollar Zones — Overview
- Several Pacific island states use the Australian dollar (A$) or New Zealand dollar (NZ$) as legal tender:
  - Australian dollar users: Nauru, Tuvalu, and Kiribati.
  - New Zealand dollar users: Cook Islands and Niue.
- Some jurisdictions issue local coins fixed at par with the relevant currency (Tuvaluan dollar and Kiribati dollar coins).

### Nauru
- Independent in 1968; IMF member in 2016.
- Uses the Australian dollar (A$) as legal tender.
- Only one bank active: Bendigo Bank Agency (agency of Bendigo & Adelaide Bank).
- Bendigo Bank Agency is regulated by the Australian Prudential Regulation Authority (APRA) and covered by the Australian deposit insurance scheme (the Financial Claims Scheme).
- In a joint statement issued in November 2023, Bendigo Bank and the government of Nauru announced that the bank plans to end its presence in Nauru and that the government is working with the Australian authorities and the Asian Development Bank to identify alternative providers of financial services.

### Tuvalu
- Became independent from the U.S. in 1978; became a member of the Fund in 2010.
- Uses the Australian dollar (A$) as legal tender and issues Tuvaluan dollar coins fixed at par with the Australian dollar; the Tuvaluan dollar is also used as a unit of account.
- Two state-owned banks: National Bank of Tuvalu (NBT) and Development Bank of Tuvalu (DBT).
- NBT holds the bulk of the system’s assets; NBT’s assets were equivalent to 160 percent of GDP in 2020 and it is the only bank able to conduct international transactions through CBRs.
- The government operates a pension fund, the Tuvalu National Provident Fund, authorized to issue loans.
- Banks are de facto unregulated: a Banking Commission Act adopted in 2011 was never properly implemented.
- Since 2015, the function of Commissioner has been allocated to the Ministry of Finance and supervision to the Public Enterprise Reporting and Monitoring Unit (PERMU).
- There is no deposit insurance or formal LOLR in Tuvalu.

### Kiribati
- Became independent from the U.K. in 1979; IMF member in 1986.
- Uses the Australian dollar (A$) as legal tender and issues Kiribati dollar coins fixed at par with the Australian dollar.
- One deposit-taking bank: ANZ Kiribati, a joint venture between the State and the ANZ group; as part of ANZ it is supervised by APRA.
- Other financial institutions: State-owned Development Bank of Kiribati and Kiribati Provident Fund (provide credit mostly personal loans and loans to SMEs), several credit unions, and a State-owned insurance company.
- Until recently there was no designated financial sector regulator; the Financial Supervisory Authority of Kiribati Act adopted in 2021 started the process of creating the Kiribati Financial Supervisory Authority (KFSA), which was formally established in 2023.
- There is no deposit insurance or formal LOLR in Kiribati.

### Cook Islands
- Self-governing since 1965 in free association with New Zealand; use the New Zealand dollar as legal tender.
- Not a member of the IMF but received IMF technical assistance in 2020.
- Four banks: two branches of foreign banks (ANZ Banking Group Ltd of New Zealand and Bank of South Pacific of Papua New Guinea), one government-owned (Bank of the Cook Islands), and one domestic onshore commercial bank catering to international clients (Capital Security Bank).
- Banks and other financial institutions are regulated and supervised by the Financial Supervisory Commission (FSC), which maintains a close working relationship with the Reserve Bank of New Zealand (RBNZ).
- The country developed as an offshore center for financial services in the 1980s; the Financial Services Development Authority (FSDA) is tasked with promoting and developing the financial services industry.
- The FSC has MoUs with the RBNZ, APRA and the Bank of Papua New Guinea (BPNG).
- A 2020 technical assistance mission recommended expanding those MoUs to include contingency planning and crisis management, and concluding additional MoUs with the parents of the foreign-owned branches.
- There is no deposit insurance or formal LOLR in the Cook Islands.

### Niue
- Self-governing since 1974 in free association with New Zealand; uses the New Zealand dollar.
- Not a member of the Fund; became a member of the ADB in 2019.
- State-owned development bank: Niue Development Bank (does not take deposits but acts as an agent for Kiwibank).
- Agreement with New Zealand’s Kiwibank to provide financial services on its territory through an agency arrangement.
- New Zealand does not currently have a deposit insurance scheme; deposits with Kiwibank are uninsured.

*Source: IMF country material on Pacific island jurisdictions.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1panea2024002-print-pdf.pdf_