## PANAMA

## Source details

**Canonical URL:** [PANAMA](https://www.imf.org/-/media/files/publications/cr/2025/english/1panea2025001-source-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1panea2025001-source-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1panea2025001-source-pdf.pdf.json)

---

### Mission composition and meetings
- In-person mission comprised Bas Bakker (Head), Wim Fonteyne, Olusegun Akanbi, Mai Hakamada (all WHD), Nariné Nersesyan (FAD), and José Daniel Rodríguez-Delgado (STA).
- Nusula Nassuna and Stephanie Forte (LEG) participated remotely in some meetings.
- Maylin Sun (SPR) contributed to the mission’s preparations and analytical work.
- André Roncaglia, Eloy Arturo Fisher Hogan, and Frank Fuentes (OED) joined some discussions.
- The mission met with Minister of Economy and Finance Felipe Chapman, Superintendent of Banks Milton Ayón Wong, General Manager of the National Bank of Panama Javier Carrizo, and other senior officials and private sector representatives.
- Julia Muñoz and Natalia Martinez-Camelo provided administrative and research support.

### Context and medium-term growth
- Pre-COVID convergence: Panama’s GDP per capita to US rose from 33 to 48 percent over the quarter century pre-COVID 19.
- Major developments: expansion of the Panama Canal and Tocumen Airport; large-scale building in Panama City; construction of one of the largest copper mines in the world.
- 2019–2024 growth: real GDP in 2024 was 18 percent higher than in 2019—a compound annual growth rate of 3.4 percent.
- Medium-term potential growth: staff estimates Panama’s potential growth rate at about 4 percent per annum.

### Recent developments — growth and labor market
- Real GDP growth (selected):
  - 2023: 7.3 percent
  - 2024: 2.9 percent (decline mainly due to closure of the Cobre Panamá copper mine)
- Non-mining GDP growth:
  - bottomed at 3.4 percent yoy in 2024:Q1
  - accelerated to 5.4 percent yoy in 2024:Q4
  - 5.2 percent yoy in 2025:Q1
- Sectoral developments:
  - Services sector grew throughout 2024 and early 2025.
  - Fixed capital formation remained strong, driven by investments in infrastructure, particularly transportation and logistics.
- Labor market:
  - The Cobre Panamá mine directly and indirectly accounted for about 5 percent of GDP and 2 percent of employment.
  - Unemployment increased from 7.4 percent in August 2023 to 9.5 percent in October 2024.

### Panama Canal operations and external sector
- Canal operations and drought:
  - Drought in 2023–24 (El Niño) caused a drop of about 1/3 in transits during the dry season.
  - Since September 2024, Canal returned to operating at full capacity, handling an average of 36 ships per day.
  - Lake Gatún reached full capacity by mid-December 2024, enabling full operational capacity through the dry season (which lasted until April 2025).
- Canal economic role:
  - The Canal facilitates 6 percent of global maritime trade; over 13,000 ships transit annually, carrying more than 500 million tons of cargo.
  - Toll revenue and ancillary services: tolls about 1.9 percent of GDP annually; related sectors about 1.1 percent of GDP; Canal and ancillary services account for large shares of services exports.
- Rio Indio Reservoir Project:
  - ACP advancing the $1.6 billion Rio Indio Reservoir Project with capacity of 1.25 billion cubic meters; if approved, expected completion by 2030 or 2031.
- Current account:
  - 2024 current account surplus: 1.9 percent of GDP (result of a trade surplus of the Colon Free Zone (CFZ) and export-processing zones (EPZs)).
  - Excluding CFZ and EPZs, current account registered a deficit of 0.4 percent of GDP in 2024, down from a surplus of 1.2 percent of GDP in 2023.
  - EBA-lite CA model: implied current account norm -1.1 percent of GDP; current account gap 0.4 percent of GDP; policy gap -0.4 percent of GDP.
- External position:
  - NIIP: -89.4 percent of GDP at end-2024.
  - Gross assets: 121.1 percent of GDP (table value).
  - Gross liabilities: 219.9 percent of GDP (table value).
  - External debt (NFPS): about 147 percent of GDP (table contexts note other debt measures).

### Inflation and prices
- CPI developments:
  - Year-on-year change in CPI dropped to -0.7 in May 2025.
  - Core inflation also at -0.7 yoy in May 2025.
- Drivers: decline in energy prices and significant slowing of food price inflation.
- Staff projection: inflation expected to remain low at 0.7 percent yoy at the end of 2025 and 2 percent over the medium term.

### Fiscal developments and public finances
- NFPS fiscal deficits (In percent of GDP):
  - 2022 Deficit: 4.0
  - 2023 Deficit: 3.9
  - 2024 Deficit: 7.4
  - 2025 Deficit: 4.0
- Deficit after correction for accounting shifts:
  - 2022: 4.8
  - 2023: 3.6
  - 2024: 7.2
  - 2025: 3.9
- Deficit after correction for accounting shifts and cycle:
  - 2022: 4.6
  - 2023: 5.3
  - 2024: 8.6
  - 2025: 3.6
- One-off factors and accounting shifts:
  - About half of the 2024 deterioration was the result of one-off factors.
  - 2023 budget benefited from one-off revenues amounting to 1.3 percent of GDP (tax and royalty payments by Minera and sale of land to ACP).
  - Settlement of arrears added another 1 percentage point.
  - Staff estimates underlying fiscal deficit increased from 4.0 to 4.8 percent of GDP.
- Government short-term response (post-July 2024):
  - Halted pending public spending programs and postponed unnecessary new hires.
  - Curtailed investment while keeping full-year investment-to-GDP ratio at about 5.3 percent of GDP.
- 2025 budget and adjustments:
  - 2025 budget aims to reduce NFPS deficit to 4.0 percent of GDP through a 4 percentage points of GDP increase in revenue compared to 2024 outcomes; budgeted spending is 0.7 percent of GDP higher than the 2024 outcome.
  - Cabinet approved in early June a plan cutting spending by 2.1 percent of GDP (0.5 percentage points of GDP in current expenditure and 1.6 percentage points in capital expenditure) while protecting priority social programs and public investment.
  - Tax revenues in the first four months of 2025 increased by 13.6 percent compared with the same period in 2024—below the targeted full year increase of 41 percent.
- Adjustments relative to the budget (percent of GDP):
  - Current Expenditures: 0.48
    - Reduction in government wage bill: 0.24
    - Streamlining institutional structures: 0.04
    - Expenditure control through restricted budget execution: 0.20
  - Capital Expenditures: 1.64
    - Postponement of new projects to 2026: 0.74
    - Budget ceiling adjustments: 0.90
  - Total: 2.12

### Revenue mobilization and tax reforms
- Staff estimates combined tax policy and administration reforms could raise revenues by 1.8 percent of GDP—1.4 points from policy changes and 0.4 points from improved collection.
- Potential revenue-raising measures (2026-29, In percent of GDP) — total: 2.51
  - Standard VAT (ITBMS) rate raised to 10 percent: 1.08
  - VAT base broadened: 0.50
  - Eliminate unproductive investment tax incentives; close loopholes: 0.26
  - Eliminate regressive personal income deductions and preferential treatments: 0.10
  - Broaden scope and improve design of excise taxation: 0.07
  - Emergency Plan to boost collection: 0.20
  - Structural Improvement Plan operationalized: 0.30
- Annex IX note: Selected Issues Paper estimates comprehensive tax reforms could yield about 2.5 percent of GDP; raising VAT from 7 percent to 10 percent projected about 1.5 percent of GDP in one note.
- Revenue administration reforms:
  - Elevate Large Taxpayers Unit to Department of Large Taxpayers; Phase I reforms fully implemented by July 2025.
  - IMF-supported task force to enhance VAT (ITBMS) compliance and expand VAT coverage to the digital economy.
  - Independent fiscal council to validate macro-fiscal assumptions.

### Policy agenda — Pension reform (Law 462, March 2025)
- Creation of Sistema Único de Capitalización con Garantía Solidaria (SUCGS) as a third pension scheme.
- SUCGS components:
  - Contributory Solidarity Capitalization Component: individual accounts annuitized at retirement.
  - Non-Contributory Solidarity Component: guarantees a $144/month minimum pension if an account falls short.
- Coverage and transition:
  - All hires from March 18, 2025 join SUCGS immediately.
  - Existing DB and mixed-scheme participants transfer into SUCGS in 2036 with no retiree losing out compared with old formulas (no-loss rule).
  - Mixed-scheme participants have a one-year election window until March 18, 2026 to opt into SUCGS; those not opting will be automatically transferred on March 1, 2036.
- Contributions and fiscal support:
  - Self-employed must contribute 9.36 percent of taxable income (optional 8.5 percent for health and maternity).
  - Employers’ contribution rates rise from 4.25 percent to 7.25 percent in three one-point steps in 2025, 2027, and 2029.
  - Employee contributions remain at 9.25 percent (some text cites 9.2 percent in other sections; source preserves both figures as presented).
  - Central government will provide an annual transfer of $966 million to the Single Solidarity Fund (SSF), to be increased annually by up to 4 percent.
  - Integrating reserves projected to result in a balance of about 9.5 percent of GDP in 2025.
- Benefit rules and guarantees:
  - “No-loss” rule (Art. 111): SUCGS annuity below legacy entitlement topped up to the higher legacy amount.
  - Universal 60 percent replacement-rate floor applies to everyone.
  - Past contributions capitalized at a guaranteed 4 percent annual yield for certain legacy calculations.

### Banking sector and financial stability
- System-wide metrics at end-December 2024:
  - Aggregate solvency ratio: 15.0 percent.
  - Aggregate liquidity ratio: 54.7 percent.
  - Non-performing loan (NPL) ratio: 2.3 percent.
  - Provisions amount to 102 percent of NPLs (includes provisions on performing loans).
  - ROE: 17.2 percent in 2024.
  - ROA: 1.8 percent in 2024.
- Credit and deposits (2024):
  - Domestic credit growth: 5.3 percent in 2024.
  - Domestic deposits grew by 5.7 percent in 2024.
  - Foreign loans and deposits growth: 17.9 and 9.4 percent respectively.
  - Foreign deposits account for about 31 percent of total (about two thirds from retail clients).
- Financial stability assessment:
  - Overall financial stability risks: moderate and broadly stable between 2011 and 2023 FSAPs.
  - Emerging concerns: rising securities holdings and increasing share of risky corporate bonds in portfolios, increasing market risk exposure.
- Regulatory measures and progress:
  - Capital Conservation Buffer regulation issued October 3, 2023; phased in by 2026.
  - Planning D-SIB surcharges in 2025.
  - SBP stress tests indicate banks can absorb adverse scenarios; liquidity and solvency buffers are strong.
  - Consideration of deposit insurance and a lender-of-last-resort framework; payment-systems law adoption targeted by end-2025 (discussions ongoing).

### Financial market development and domestic debt
- Government aims to raise domestic debt share to 30 percent by 2030 (from 18 percent at end-2024).
- Plans: larger, regularly scheduled issuances, an OTC market, and direct retail offerings.
- Constraints: need for technical infrastructure and reliable liquidity sources; banks’ preference for foreign securities and absence of a central bank limit market depth.

### Outlook and key macro projections
- GDP growth projections:
  - GDP growth: 2022 = 10.8; 2023 = 7.4; 2024 = 2.9; 2025 = 4.5
  - 2025–2030 projections (table): 2025 = 4.5; 2026–2030 = 4.0 each year
- Inflation (eop, yoy in percent): 2022 = 2.1; 2023 = 1.9; 2024 = -0.2; 2025 = 0.7
- Credit growth (Private, nominal, yoy in percent): 2022 = 6.4; 2023 = 3.5; 2024 = 4.4; 2025 = 5.0
- Fiscal Balance (percent of GDP): 2022 = -4.0; 2023 = -3.9; 2024 = -7.4; 2025 = -4.0
- Public debt (NFPS, percent of GDP): 2022 = 52.7; 2023 = 51.5; 2024 = 57.6; 2025 = 59.5
- Current account (percent of GDP): 2022 = 0.0; 2023 = -3.1; 2024 = 1.9; 2025 = -0.9
- Medium-term current account: projected to reach about 2.5 percent of GDP deficit, financed by FDI inflows.

### Debt dynamics, sustainability, and projections
- NFPS gross debt (percent of GDP) projection excerpt:
  - 2024: 57.6
  - 2025: 59.5
  - 2026: 60.2
  - 2027: 60.5
  - 2028: 60.2
  - 2029: 59.4
  - 2030: 58.2
- Baseline and risks:
  - Debt projected to stabilize with GFNs at manageable levels, contingent on credible multi-year plan meeting SFRL targets.
  - DSA: debt assessed as sustainable with high probability, overall risk of sovereign stress: Moderate.
- Public debt consolidation mechanics (selected):
  - Gross financing needs (Percent of GDP): 11.4 (2024), 9.2 (2025), 9.1 (2026), 5.8 (2027), 6.4 (2028), 5.9 (2029), 5.2 (2030).
  - Debt service (Percent of GDP): 6.9 (2024), 8.7 (2025), 8.8 (2026), 5.8 (2027), 6.8 (2028), 6.8 (2029), 6.8 (2030).

### Downside and domestic risks
- Key downside risks:
  - Loss of investment grade: recent rating actions (Fitch downgraded to below IG in March 2024; S&P downgraded in November 2024; Moody’s changed outlook to negative in December 2024) raise risk of losing IG.
  - Delays in implementing reforms due to fragmented National Assembly and social unrest.
  - Social unrest: currently concentrated in Bocas del Toro (province represents 1.4 percent of Panama’s GDP) but could spread.
  - Droughts from El Niño: could affect Canal operations and revenues.
  - Arbitration risk related to Cobre Panamá closure and potential large damages awards.
  - External risks: global downturn and trade tensions could affect Canal revenues.
  - Financial sensitivity to U.S. and global financial conditions could raise sovereign spreads.
- Risk Assessment Matrix (selected domestic risks):
  - Setbacks in fiscal consolidation — Likelihood: High; Time Horizon: ST, MT; Expected Impact: High.
  - Social Discontent — Likelihood: High; Time Horizon: ST, MT; Expected Impact: High.
  - Loss Of Investment Grade Status — Likelihood: High; Time Horizon: ST, MT; Expected Impact: High.
  - Droughts — Likelihood: High; Time Horizon: MT; Expected Impact: Medium.

### Cobre Panamá developments and arbitration
- First Quantum suspended its $20 billion arbitration proceedings over the closure of the Cobre Panamá mine for 60 days in April 2025; Franco-Nevada and KOMIR subsequently also suspended proceedings.
- Authorities authorized export of stock of copper concentrate worth about $300 million (0.3 percent of GDP) and adopted the Preservation and Safe Management Plan.
- Terms of reference for environmental and business audits prepared; other investors and contractors seeking an additional $7 billion.

### Policy implications and recommendations
- Fiscal policy:
  - If downside risks materialize, fiscal policy may need tightening to prevent a sharp rise in risk premiums.
  - Reintroduce and secure revenue reforms from 2025 onward to restore fiscal buffers and meet revised SFRL path (deficit target of 2.0 percent of GDP by 2029).
  - Staff recommends revenue reforms including VAT rate lift, base broadening, phasing out unproductive corporate tax preferences, curbing regressive personal income deductions, expanding excise taxes, and strengthening tax administration.
- Pension reform:
  - SUCGS implementation and actuarial review in six years to assess retirement age adjustments.
- Financial sector:
  - Improve bank resolution framework, adopt payment-systems law, consider deposit insurance and a lender-of-last-resort, and subject Fintech/VASPs to AML/CFT supervision as defined by FATF standards.
- Climate resilience:
  - Proceed with investments to maintain Canal operations during future droughts (e.g., Rio Indio), prepare a Disaster Resilience Strategy (DRS), and ensure targeted social protection for climate impacts.
- Governance and structural reforms:
  - Strengthen governance and transparency (SOE governance, anti-corruption, judicial efficiency) to attract FDI and support long-term convergence.
  - Improve education quality through cost-effective strategies.

### Authorities’ views and commitments
- Authorities broadly concurred with staff’s assessment of risks and outlook.
- They seek to avoid a downgrade to below IG by meeting fiscal deficit targets under the new SFRL, including the 4 percent target for 2025, and finding a solution for the mine.
- Authorities committed to fiscal consolidation measures, revenue mobilization, and structural reforms while protecting priority social programs and public investment.
- Authorities emphasized opportunities from new public investment projects and sectors such as logistics, tourism, and semiconductors; President Mulino announced an ambitious public investment plan including a rail line to Costa Rica.
- Authorities expect benefits from ACP planned investments, notably the Rio Indio project.

*Source: IMF staff report (selected pages and sections from the 2025 Panama PDF).*

### 2025. The in-person mission comprised Bas Bakker (Head), Wim

### PANAMA

### Mission composition and meetings
- In-person mission comprised Bas Bakker (Head), Wim Fonteyne, Olusegun Akanbi, Mai Hakamada (all WHD), Nariné Nersesyan (FAD), and José Daniel Rodríguez-Delgado (STA).
- Nusula Nassuna and Stephanie Forte (LEG) participated remotely in some meetings.
- Maylin Sun (SPR) contributed to the mission’s preparations and analytical work.
- André Roncaglia, Eloy Arturo Fisher Hogan, and Frank Fuentes (OED) joined some discussions.
- The mission met with Minister of Economy and Finance Felipe Chapman, Superintendent of Banks Milton Ayón Wong, General Manager of the National Bank of Panama Javier Carrizo, and other senior officials and private sector representatives.
- Julia Muñoz and Natalia Martinez-Camelo provided administrative and research support.

### Context
- In the quarter century pre-COVID 19, Panama saw rapid convergence with advanced economies: the ratio of Panama’s GDP per capita to that of the US grew from 33 to 48 percent.
- Major infrastructure and sectoral developments included expansion of the Panama Canal and Tocumen Airport, large-scale building in Panama City, and construction of one of the largest copper mines in the world.
- In 2024, real GDP was 18 percent higher than in 2019—a compound annual growth rate of 3.4 percent.
- Post-pandemic growth was driven by a rebound in construction and rapid expansion of the services sector, amid modest inflationary pressures.
- Panama was removed from the Financial Action Task Force (FATF)’s list of jurisdictions under increased monitoring (“grey list”) in October 2023 and was subsequently removed from the EU list of high-risk third countries; Panama continues to work with the EU to achieve its removal from the EU list of non-cooperative jurisdictions for tax purposes.

### Recent developments — growth and labor market
- Real GDP growth:
  - 2023: 7.3 percent
  - 2024: 2.9 percent (decline mainly due to closure of the Cobre Panamá copper mine)
- The Cobre Panamá mine directly and indirectly accounted for about 5 percent of GDP and 2 percent of employment.
- Unemployment increased from 7.4 percent in August 2023 to 9.5 percent in October 2024.
- Non-mining GDP growth:
  - bottomed out at 3.4 percent yoy in 2024:Q1,
  - accelerated to 5.4 percent yoy in 2024:Q4,
  - 5.2 percent yoy in 2025:Q1.
- Services sector grew throughout 2024 and early 2025.
- Fixed capital formation remained strong, driven by investments in infrastructure, particularly transportation and logistics.

### Panama Canal and external sector
- Canal operations:
  - Suffered a drop of about 1/3 in transits during the 2023–24 dry season due to an El Niño-triggered drought.
  - Since September 2024, returned to operating at full capacity, handling an average of 36 ships per day.
  - Lake Gatún reached full capacity by mid-December 2024, enabling full operational capacity throughout the dry season (which lasted until April 2025).
- Current account:
  - 2024 current account surplus: 1.9 percent of GDP (result of a trade surplus of the Colon Free Zone (CFZ) and export-processing zones (EPZs)).
  - Excluding CFZ and EPZs, current account registered a deficit of 0.4 percent of GDP in 2024, down from a surplus of 1.2 percent of GDP in 2023.
  - The 2024 external position is assessed to be broadly consistent with the level implied by fundamentals and desirable policy settings (Annex VI).

### Inflation and prices
- Inflation developments:
  - Year-on-year change in CPI dropped to -0.7 in May 2025.
  - Core inflation also at -0.7 yoy in May 2025.
- Drivers of inflation decline included a decline in energy prices and a significant slowing of food price inflation.

### Fiscal developments and public finances
- NFPS (Non-Financial Public Sector) fiscal deficits (In percent of GDP):
  - 2022 Deficit: 4.0
  - 2023 Deficit: 3.9
  - 2024 Deficit: 7.4
  - 2025 Deficit: 4.0
- Deficit after correction for accounting shifts:
  - 2022: 4.8
  - 2023: 3.6
  - 2024: 7.2
  - 2025: 3.9
- Deficit after correction for accounting shifts and cycle:
  - 2022: 4.6
  - 2023: 5.3
  - 2024: 8.6
  - 2025: 3.6
- Adjustment for non-inclusion of pension contributions to defined contribution scheme in NFPS revenues:
  - 2022: -1.1
  - 2023: -1.1
  - 2024: -1.1
  - 2025: 0.0
- Deficit after correction for accounting shifts, cycle and one-offs:
  - 2022: 3.5
  - 2023: 5.7
  - 2024: 6.6
  - 2025: 3.8
- One-off factors and accounting shifts:
  - About half of the 2024 deterioration was the result of one-off factors.
  - 2023 budget benefited from one-off revenues—tax and royalty payments by Minera and the sale of land to the Panama Canal Authority (ACP)—amounting to 1.3 percent of GDP.
  - Another 1 percentage point resulted from the settlement of arrears, including from previous years.
  - Staff estimates that the underlying fiscal deficit increased from 4.0 to 4.8 percent of GDP.
- Policy responses by the government taking office in July 2024:
  - Halted pending public spending programs and postponed unnecessary new hires.
  - Curtailed investment while keeping the full-year investment-to-GDP ratio at about 5.3 percent of GDP.

### Sovereign spreads and ratings
- Government bond spreads increased in the second half of 2023 and early-2024; since then, spreads have hovered around 100–150 bps above levels seen in investment grade peers.
- Fitch downgraded Panama to below IG in March 2024.
- Moody’s and S&P both rate Panama at their lowest IG rating following a downgrade by S&P in November 2024.
- Moody’s changed its outlook to negative in December 2024.

### Banking sector and financial stability
- Banking system metrics at end-December 2024:
  - Aggregate solvency ratio: 15.0 percent.
  - Aggregate liquidity ratio: 54.7 percent.
- Regulatory context: ratios almost double regulatory requirements.
- Non-performing loan (NPL) ratio: 2.3 percent (gradually decreasing).
- Provisions amount to 102 percent of NPLs (includes provisions on performing loans).
- Sector profitability:
  - Return on Equity (ROE): 17.2 percent in 2024.
  - Return on Assets (ROA): 1.8 percent in 2024.
- Developments and vulnerabilities:
  - Interest margins on lending compressed as deposit rates rose more than lending rates.
  - Profitability supported by interest income from securities and other assets, growing fee and commission income, and controlled expenses.
  - Banks are well-capitalized and liquid.
  - Security holdings as a share of banks’ total assets are on the rise, with an increasing share of more risky corporate bonds in securities portfolios, raising market risk exposure.
  - The international license banks’ share of the banking system has come down.
  - Banks’ exposure to Cobre Panamá was limited; the mine investment was financed from abroad and exposures through personal and mortgage loans to mine employees were limited.

### Financial stability assessment (overview)
- Between the 2011 and 2023 FSAPs, overall financial stability risks have remained moderate and broadly stable.
- Some vulnerabilities have declined (banking system size relative to GDP trended downward; capital ratios trended upward).
- Noted emerging concerns include rising securities holdings and increased share of risky corporate bonds in those portfolios, increasing market risk susceptibility.

*Source: IMF staff report (selected pages and sections from the 2025 Panama PDF).*

### 14.      Higher interest rates have boosted deposit growth, while credit growth has remained

### 14.      Higher interest rates have boosted deposit growth, while credit growth has remained

### Banking, credit, and deposits
- Domestic credit growth, at 5.3 percent in 2024, spanned various sectors except construction.
- The pace of new credits issued has been accelerating throughout the post-pandemic period, with trade (including services), consumers, industry, and financial companies being the primary beneficiaries.
- Domestic deposits grew by 5.7 percent in 2024.
- Higher interest rates have driven a shift from demand and savings to term deposits.
- Foreign loans and deposits saw stronger growth, at 17.9 and 9.4 percent respectively.
- Foreign deposits account for about 31 percent of the total and are primarily from retail clients (about two thirds) from a diverse set of countries within the region, with Colombia being the largest source.
- In 2024, foreign interbank deposits (+18.3 percent) saw stronger growth than retail deposits (+6.1 percent).
- The foreign loan portfolio is likewise geographically diversified, primarily within the region.

### Cobre Panamá arbitration and mine developments
- In April 2025, First Quantum suspended its $20 billion arbitration proceedings over the closure of the Cobre Panamá mine for 60 days.
- Two other major claimants, Franco-Nevada and KOMIR, subsequently also suspended their arbitration proceedings.
- Suspension had been demanded by the government as a precondition for negotiations.
- The authorities have authorized the export of the stock of copper concentrate, worth about $300 million (0.3 percent of GDP), and adopted the Preservation and Safe Management Plan for the mine, to be implemented by Minera.
- Terms of reference for environmental and business audits have been prepared; the audit results should help determine future options for the mine.
- Note: Other investors and contractors are seeking an additional $7 billion.

### Outlook and key macro projections
- GDP growth is projected to increase to 4½ percent in 2025.  
- Non-mining GDP growth is expected to decelerate due to fiscal consolidation, but overall GDP growth will increase due to base effects (as 2025 figures will no longer be compared against a period that included the now closed copper mine).
- Over the medium term, GDP growth is projected at about 4 percent per annum.
- Inflation is expected to remain low at 0.7 percent yoy at the end of 2025 and 2 percent over the medium term.
- The current account is projected to return to a deficit in 2025 of 0.9 percent of GDP and converge to levels consistent with the norm over the medium term.
- The ongoing re-export of the unusual imports into the CFZ and EPZs in 2023 is expected to continue in 2025 and contain the current account deficit on a transitory basis.
- In the medium term, the current account deficit is projected to reach 2.5 percent of GDP, in line with the estimated current account norm for Panama, and expected to be adequately financed by FDI inflows.

### Table of selected estimates and projections (as presented)
- GDP growth: 2022 = 10.8; 2023 = 7.4; 2024 = 2.9; 2025 = 4.5
- Inflation (eop, yoy in percent): 2022 = 2.1; 2023 = 1.9; 2024 = -0.2; 2025 = 0.7
- Credit growth: Private (nominal; yoy in percent): 2022 = 6.4; 2023 = 3.5; 2024 = 4.4; 2025 = 5.0
- Fiscal Balance: 2022 = -4.0; 2023 = -3.9; 2024 = -7.4; 2025 = -4.0
- Public debt (NFPS): 2022 = 52.7; 2023 = 51.5; 2024 = 57.6; 2025 = 59.5
- Current account: 2022 = 0.0; 2023 = -3.1; 2024 = 1.9; 2025 = -0.9

### Downside risks
- Loss of investment grade: Following the considerable fiscal deterioration in 2024 and Moody’s December 2024 decision to change its outlook for Panama to “negative,” Panama is at risk of losing IG.
- Delays in implementing reforms: The fragmented National Assembly and social unrest pose challenges to the government's ambitious plans for fiscal consolidation and reforms, potentially leading to a suboptimal equilibrium characterized by low growth and worsening fiscal dynamics.
- Social unrest: Ongoing social unrest, currently concentrated in the Bocas del Toro province, could spread and become more economically damaging.
- Droughts from El Niño: Could affect the operations of the Panama Canal.
- Arbitration risk: Arbitration proceedings over the Cobre Panamá closure, which could resume if negotiations fail, could potentially result in large damages awards against the Panamanian State.
- External risks: A downturn in the global economy and international trade tensions could affect global trade and Canal revenues; geopolitical developments could directly affect the Canal’s revenues and relations with key trading partners.
- Financial sensitivity: Panama’s financial system is sensitive to U.S. and global financial conditions; tightening could exacerbate the effects of Panama-specific developments in its sovereign spreads.

### Credit ratings snapshot
- Moody’s: Baa3, Negative, 1 Notch Above Cutoff
- S&P: BBB-, Stable, 0 Notches Above Cutoff
- Fitch: BB+, Stable, 0 Notches Above Cutoff

### Policy implications and fiscal stance
- If downside risks materialize, fiscal policy may need to be tightened to prevent a sharp rise in risk premiums; as a dollarized economy, Panama has no monetary or exchange rate policy instruments to absorb shocks.
- Upside risks:
  - Successful implementation of the government's reform agenda could improve the outlook with higher growth, lower fiscal deficits, declining public debt ratios, and lower financing costs.
  - Reopening of the mine would significantly improve growth, employment and fiscal outlook and could remove risks from arbitration proceedings.

### Authorities’ views
- Authorities broadly concurred with staff’s assessment of risks and outlook.
- They sought to avoid a downgrade to below IG by meeting the fiscal deficit targets under the new SFRL, including the 4 percent target for 2025, and finding a solution for the mine.
- Authorities recognized challenges from the fragmented National Assembly but saw reduced risk of large-scale public protests compared to 2022-23.
- They did not expect ongoing protests in Bocas del Toro to significantly affect the economy, as the province represents only 1.4 percent of Panama’s GDP.
- Authorities emphasized opportunities from new public investment projects and sectors such as logistics, tourism, and semiconductors; President Mulino announced an ambitious public investment plan including a rail line to Costa Rica.
- Authorities expect benefits from ACP planned investments, notably the Rio Indio project, which would allow the Canal to operate at full capacity through future droughts but was unlikely to be completed before the next El Niño.

### Policy agenda — Pension reform
- The new law creates the Sistema Único de Capitalización con Garantía Solidaria (SUCGS), a third pension scheme running alongside current defined-benefit and mixed plans.
- SUCGS components:
  - Contributory Solidarity Capitalization Component: each worker’s contributions build an individual account annuitized at retirement.
  - Non-Contributory Solidarity Component: guarantees a $144/month minimum pension if an account falls short.
- All hires from March 18, 2025, join SUCGS immediately.
- Retirement annuities will vary with investment returns but cannot drop below 60 percent of the reference salary.
- Existing participants in DB and mixed schemes transfer into SUCGS in 2036 and receive annuities calculated so that no retiree loses out compared with the old formulas.
- The reform merges the assets of the three pension schemes and creates a Single Solidarity Fund—capitalized by merging reserves of legacy DB and mixed schemes and backed by an annual $966 million government transfer.
- Self-employed workers must contribute 9.36 percent of taxable income (with an optional 8.5 percent for health and maternity); employers’ contribution rates rise from 4.25 percent to 7.25 percent in three one-point steps in 2025, 2027, and 2029. Employee contributions remain at 9.25 percent.
- An actuarial review, scheduled in six years, will assess whether the retirement age needs to be raised.
- The pension reform increases 2025 NFPS revenue by 1.1 percentage points of GDP; 0.1 percentage point from the increase in employer contributions by 1 percentage point, remainder due to an accounting change including mixed-scheme participant contributions in NFPS revenues.

### Policy agenda — Fiscal policy and budget
- The new fiscal path aims to reduce the NFPS fiscal deficit to 2.0 percent of GDP by 2029 through gradual adjustment; under the revised SFRL, the deficit ceiling declines by 0.5 percent of GDP each year—from 4.0 percent in 2025 to 1.5 percent from 2030 onward—pushing public debt down to 40 percent of GDP by 2040.
- The 2025 budget aims to reduce the NFPS deficit to 4.0 percent of GDP through a 4 percentage points of GDP increase in revenue compared to 2024 outcomes; budgeted spending is 0.7 percent of GDP higher than the 2024 outcome.
- Staff views revenue forecasts in the 2025 budget as optimistic; short-term yields of administrative measures are likely limited.
- In light of revenue shortfalls in Q1:2025, the cabinet approved in early June a plan cutting spending by 2.1 percent of GDP (0.5 percentage points of GDP in current expenditure and 1.6 percentage points in capital expenditure) while protecting priority social programs and public investment.
- Tax revenues in the first four months of 2025 increased by 13.6 percent compared with the same period in 2024—below the targeted full year increase of 41 percent.
- After adjustments, real spending growth in 2025 slows from 11.7 percent in the budget to 1.9 percent.
- Cuts in capital expenditure will be made by postponing new investment projects to 2026 and adjusting ceilings for ongoing projects; ministries have spending ceilings and flexibility to allocate current expenditure cuts; expected reduction in the government wage bill through payroll optimization; some public institutions to be streamlined and downsized.

### Adjustments relative to the budget
- Current Expenditures: 0.48 percent of GDP
  - Reduction in the government wage bill (personnel expenditures): 0.24
  - Streamlining of institutional structures: 0.04
  - Expenditure control through restricted budget execution: 0.20
- Capital Expenditures: 1.64 percent of GDP
  - Postponement of new projects to 2026: 0.74
  - Budget ceiling adjustments based on conservative revenue forecasts: 0.90
- Total: 2.12 percent of GDP

### Revenue administration and governance reforms
- Strengthening collections: the Large Taxpayers Unit (LTU) is being elevated to a Department of Large Taxpayers.
- Phase I of the LTU reform—(i) a formal annual information-sharing protocol with the General Taxpayer Registration unit, (ii) streamlined administrative procedures, and (iii) dedicated online service channels—will be fully implemented by July 2025.
- Data-sharing mechanisms with the Legal Department are operational to identify inconsistencies and enhance fiscal oversight.
- An IMF-supported task force to enhance VAT (ITBMS) compliance is: (i) identifying and closing fraud gaps; (ii) implementing advanced monitoring and control systems linked to the e-Tax2 platform; (iii) establishing and strengthening critical control points to minimize fraud related to VAT (ITBMS) tax credits; and (iv) expanding VAT (ITBMS) coverage to the digital economy.
- MEF has reinstated legally binding spending ceilings for current and capital outlays and begun technical assistance to upgrade revenue forecasting.
- An independent fiscal council is to be operationalized to validate macro-fiscal assumptions and improve coordination with the Comptroller General for transparent execution of appropriations.
- Authorities are reviewing legal spending mandates and statutory earmarks, payroll rules, and transfer programs to free resources and align allocations with institutional capacity; transfers to revenue-generating entities will require those entities to exhaust own resources before requesting budget support.
- Education mandate review: legislation mandates spending of at least 7 percent of GDP; authorities are evaluating legal adjustments to better synchronize appropriations with absorptive capacity and NFPS targets.
- Plans to streamline several public institutions are being finalized with support from the IDB, World Bank, and IMF staff.

*Source: Excerpts from IMF staff report text.*

### 36.      Staff welcomed these measures but urged further revenue reforms from 2025 onward

### 36.      Staff welcomed these measures but urged further revenue reforms from 2025 onward

### Revenue measures and projected gains
- Combined tax policy and administration reforms could raise revenues by 1.8 percent of GDP—1.4 points from policy changes and 0.4 points from improved collection—bringing spending back in line with the medium-term fiscal plan.
- Policy measures described:
  - Lift the standard VAT (ITBMS) rate.
  - Broaden the VAT base.
  - Phase out unproductive corporate tax preferences.
  - Curb regressive personal income deductions.
  - Expand excise taxes.
- Administration reforms described:
  - Focus on the DGI’s Structural Improvement Plan: finalizing its medium-term strategy.
  - Adopt a comprehensive compliance-risk framework.
  - Enhance coordination with the National Customs Authority (Autoridad Nacional de Aduanas, ANA).
  - Refine organizational models.
  - Prioritize the hiring of qualified personnel.

### Panama: Potential Tax Revenue‑Raising Measures, 2026-29 (In percent of GDP)
- Potential revenue gain
  - Standard VAT (ITBMS) rate is raised to 10 percent1.08
  - VAT base is broadened 1/0.50
  - Unproductive investment tax incentives are evaluated and eliminated; loopholes are closed 2/0.26
  - Regressive personal income deductions and preferential treatments are eliminated 3/0.10
  - Scope of excise taxation is broadened; design is improved 4/0.07
  - The Emergency Plan focusing on priority areas to boost collection is implemented 5/0.20
  - The Structural Improvement Plan is operationlized 6/0.30
  - Total:2.51
- Notes from source:
  - Source: IMF Staff calculations, based on FAD Technical Reports (Benedek et al. (2020) and Klemm et al. (2022)), CIAT, The Tax Expenditure Database for Latin America and the Caribbean (TEDLAC), Dirección General de Ingresos, Boletín Estadístico Tributario, Enero - Diciembre 2022
  - 1/ Includes elimination of exemptions on soft drinks, non-essential alimentary products, privately-provided medical services, as well as miscellaneous and outdated preferential treatments
  - 2/ Includes elimination of select tax incentives (e.g. in the tourism industry), a stand still on establishment of new Free Zones, introduction of limits on interest deductibility to protect the tax base, and leveling the capital gains tax rate with corporate tax rate
  - 3/ Includes removal of lump-sum compensation for representation expenses, elimination of mortgage interest deduction and curtailing deductions for medical expenses and education loans
  - 4/ Includes introduction of excises on plastic bags and hard-to-dispose materials and raising excises rates on tobacco and alcohol
  - 5/ Includes close oversight of large taxpayers and the control of VAT chain of taxpayer operations
  - 6/ Includes implementation of the DGI's medium-term strategy, improvements of DGI's organizational model, management, and personnel, and implementation of a new framework for compliance risk management.

### Consolidated fiscal balance highlights (selected figures as presented)
- Total Revenue
  - 13,282     17.4
  - 14,652     17.6
  - 16,410     19.0
  - 13,611     15.8
  - 17,938     19.8
  - 16,056     17.7
- Taxes
  - 5,866     7.7
  - 6,292     7.5
  - 7,282     8.4
  - 5,787     6.7
  - 8,164     9.0
  - 6,453     7.1
- Nontaxes
  - 3,421     4.5
  - 3,811     4.6
  - 4,390     5.1
  - 3,676     4.3
  - 4,862     5.4
  - 4,097     4.5
- CSS
  - 3,721     4.9
  - 3,918     4.7
  - 4,374     5.1
  - 3,951     4.6
  - 4,642     5.1
  - 5,268     5.8
- Total Expenses
  - 16,326     21.3
  - 17,923     21.5
  - 21,242     24.6
  - 20,027     23.2
  - 21,606     23.9
  - 19,706     21.8
- Current expenses
  - 12,213     16.0
  - 13,528     16.2
  - 15,508     18.0
  - 15,437     17.9
  - 16,244     17.9
  - 15,818     17.5
- Interests
  - 1,318     1.7
  - 2,147     2.6
  - 2,774     3.2
  - 2,519     2.9
  - 3,180     3.5
  - 3,180     3.5
- Capital expenses
  - 4,114     5.4
  - 4,395     5.3
  - 5,733     6.6
  - 4,590     5.3
  - 5361     5.9
  - 3888     4.3
- Memo
  - Primary Balance
    - -1,727 -2.3
    - -1,124 -1.3
    - -2,057 -2.4
    - -3,897 -4.5
    - -487.8 -0.5
    - -470 -0.5
  - Overall Balance
    - -3,045 -4.0
    - -3,271 -3.9
    - -4,832 -5.6
    - -6,416 -7.4
    - -3667.5 -4.0
    - -3650 -4.0
- 1/ Revenues reflect staff projections, while expenditures are based on the authorities’ revised spending plans.

### Spending-side measures and fiscal flexibility
- Planned spending measures:
  - Gradual lowering of the wage bill.
  - Reduction in spending on non-priority goods and services.
  - Phased reduction in subsidies, including targeted reforms of the liquefied petroleum gas program and a refocusing of the mortgage interest subsidy program.
- Fiscal mandate and budget process reforms:
  - Revisiting spending mandates and commitments to increase budget flexibility.
  - Ongoing review of legal spending mandates by the authorities.
  - Recommendation that revenue projections in the budget be verified by the independent fiscal council once operational, to address optimistic revenue projections and help meet fiscal deficit targets.
- Mortgage interest subsidy reform:
  - The National Assembly adopted the revised mortgage interest subsidy program on April 10, 2025.
  - The authorities estimate that it will save $100-150 million annually compared to the previous program.

### State-Owned Enterprises (SOEs) and governance
- Panama has 16 non-financial and 5 financial SOEs.
- Observations and recommendations:
  - SOEs are managed by politically appointed Boards and management teams with limited financial independence.
  - Some SOEs perform well; others consistently incur losses and depend on the government budget.
  - Drawing lessons from the ACP, greater independence in governance, finances, and operations, coupled with increased transparency and more effective oversight, would be beneficial.
- Reference: See accompanying Selected Issues Paper titled “State-Owned Enterprises in Panama”.

### Authorities’ views on fiscal developments and actions
- Factors contributing to fiscal challenges:
  - Increase in the cost of debt service.
  - Existence of special laws imposing automatic increases in spending, particularly wages.
  - Granting of obsolete tax incentives that eroded government tax revenues.
- Commitment and actions:
  - Full commitment to a credible and sustainable fiscal adjustment for 2025, in strict observance of the SFRL.
  - Adopted a comprehensive expenditure package to hold NFPS spending at least 2 percent of GDP below the approved budget ceiling, while fully protecting priority social programs and public investment, in light of Q1: 2025 revenue shortfalls.
  - Authorities emphasized a comprehensive strategy to strengthen revenue collection, review spending mandates, and improve the budget process as collective anchors for fiscal sustainability.

### Financial sector and domestic debt market development
- Banking sector stability:
  - Banking system described as stable and sound with substantial solvency and liquidity buffers, solid profitability, and prudent management practices.
  - SBP prioritized addressing specific situations in a few banks and discouraging risky practices, particularly in consumer lending.
  - SBP credit stress test results indicate banks can absorb increased provisions from an adverse economic scenario.
- Regulatory and supervisory progress:
  - Advanced key 2023 FSAP recommendations: enacting a capital conservation buffer phased in by 2026; planning D-SIB surcharges in 2025.
  - Addressed Basel Core Principles gaps, plan to overhaul the bank-resolution framework, and considering deposit insurance and a lender-of-last-resort.
  - Enhancing macroprudential statistics, rolling out borrower-based tools, and refining stress tests.
- Domestic debt market objectives:
  - Government aims to raise the share of domestic debt in its total debt to 30 percent by 2030 (up from 18 percent at end-2024).
  - Plans include larger, regularly scheduled issuances, an OTC market, and direct retail offerings.
  - Considerations: need for solid technical infrastructure and reliable liquidity sources; Panamanian banks' preference for foreign securities and Panama’s small size and lack of a central bank constrain market depth.

### Growth, structural issues, and data improvements
- Growth outlook and potential:
  - Staff estimates Panama’s potential growth rate stands at about 4 percent.
  - GDP growth is expected to improve to 4½ percent in 2025 and is projected at around 4 percent over the medium term.
- Structural challenges:
  - In the two decades before the pandemic, GDP grew at an average rate of 6 percent annually.
  - Real wage growth was slow; informality increased; labor income share declined while gross operating surplus increased.
  - Regional income disparities between Panama City/Colón and rural areas/comarcas require a multidimensional long-term strategy and short-term measures.
- Education:
  - Priority on cost-effective strategies to improve educational quality; increased spending alone insufficient.
- Data improvements:
  - Authorities made progress closing critical data gaps following the 2024 Article IV Consultation.
  - Improved recording of CFZ-related transactions and publishing detailed central government data in the CMCA database.
  - Timeliness of key macroeconomic statistics returned to pre-Covid standards; prospects for SDDS subscription favorable with minor improvements to the IMAE timeliness.

*Source: IMF staff text as provided in the content unit.*

### 64.      The government’s fiscal targets embedded in the revised SFRL path to reduce the

### The government’s fiscal targets embedded in the revised SFRL path to reduce the NFPS fiscal deficit

### Fiscal targets and debt trajectory
- The government’s fiscal targets embedded in the revised SFRL path aim to reduce the NFPS fiscal deficit to 2.0 percent of GDP by 2029.
- Adhering to these targets would enable a steady reduction in the debt-to-GDP ratio to 40 percent by 2040, a level of debt assessed to be sustainable with high probability.
- Expected benefits: enhance market confidence, reduce financing costs, and create fiscal space for future shocks.

### 2025 spending reduction plan
- The spending reduction plan approved by the cabinet, if fully implemented, would be consistent with meeting the 2025 fiscal target.
- Quantified impact: the plan would reduce spending by 2.1 percentage points of GDP relative to the adopted 2025 budget.
- Composition: a combination of restraint in current expenditures and significant reductions in planned investment expenditures, while preserving priority social programs and public investment.
- Forward-looking: in 2026 and beyond, authorities’ commitment to implementing revenue reforms would allow recovering space for priority social and public investment, while advancing structural fiscal consolidation in line with the SFRL.

### Budget flexibility and revenue verification
- Strategy to revisit spending mandates and commitments would enhance budget flexibility and capacity to absorb shocks and pursue new priorities.
- Verification of revenue projections by the independent fiscal council, once operationalized as planned by the authorities, will help improve the budgeting process.

### Pension reform
- The pension reform addresses the financial shortfalls of the defined benefit scheme.
- Policy change: creation of the non-contributory solidarity pension component to improve Panama’s social safety net.
- Further actions: additional adjustments of the pension system will be needed in the future to ensure long-term sustainability.
- Governance step: the forthcoming actuarial review is welcome as it provides an opportunity to assess the need to increase the currently low retirement age.

### Banking sector resilience and regulatory reforms
- Improving the bank resolution framework will help underpin the banking system’s financial soundness.
- Evidence: aggregate indicators and SBP stress tests confirm the sector’s resilience.
- SBP actions: efforts to address specific situations in a few banks and discourage risky practices, and consideration of a financial safety net, are welcome steps.
- Reform gaps: adoption of a payment-systems law and revision of the bank resolution law remain essential to fulfill the reform agenda’s stability and development objectives.
- Caution: while developing local financial markets promises benefits, maintaining a careful balance between market development and financial stability is crucial for lasting success.
- Note: authorities have advanced key 2023 FSAP recommendations.

### AML/CFT and fintech supervision
- Continued commitment to implementing effectively the AML/CFT standards will contribute to maintaining Panama’s status as a regional financial center.
- Regulatory recommendation: All Fintech companies that carry out the activities of financial institutions or virtual asset service providers as defined by the FATF standards should be subject to AML/CFT regulation and supervision.

### Governance, education, and regional disparities
- Further improvements in governance and education would help foster continued convergence of Panama’s income level with advanced economies.
- Addressing income inequality requires targeted interventions in rural areas, focusing on infrastructure and education to reduce disparities with urban regions.
- Ongoing efforts to improve the availability of macro-financial data will support transparency and policy making.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1panea2025001-source-pdf.pdf*

### 71.      It is recommended that the next Article IV Consultation take place on the standard 12-

### PANAMA

### Recent real developments
- Real GDP (2007 prices): 2022: 10.8; 2023: 7.4; 2024: 2.9; 2025–2030 projections: 4.5, 4.0, 4.0, 4.0, 4.0, 4.0.
- Consumer price index (average): 2022: 2.9; 2023: 1.5; 2024: 0.8; 2025–2030: 0.4, 2.0, 2.0, 2.0, 2.0, 2.0.
- Output gap (% of potential): 2022: -1.0; 2023: 0.0; 2024: -2.0; 2025–2030: -1.0, 0.0, 0.0, 0.0, 0.0, 0.0.
- Key demand components (selected):
  - Private consumption: 2022: 3.0; 2023: 4.8; 2024: -0.9; 2025–2030: 4.5, 4.0, 4.0, 4.0, 4.0, 4.0.
  - Public investment (percent of GDP): 2022: 11.9; 2023: 8.5; 2024: 0.1; 2025–2030: -2.0, 9.2, 14.4, 10.2, 9.2, 6.1.

### Fiscal developments and public finances
- Consolidated Non-Financial Public Sector (selected):
  - Revenue and grants (percent of GDP): 2022: 19.9; 2023: 20.5; 2024: 18.5; 2025–2030 projections: 20.5, 20.8, 21.2, 21.8, 22.4, 22.7.
  - Expenditure (percent of GDP): 2022: 22.9; 2023: 23.6; 2024: 25.2; 2025–2030: 23.6, 23.1, 23.1, 23.1, 23.2, 22.9.
  - Overall balance, including ACP (percent of GDP): 2022: -3.1; 2023: -3.1; 2024: -6.7; 2025–2030: -3.0, -2.3, -1.8, -1.3, -0.7, -0.2.
  - Overall balance, excluding ACP (percent of GDP): 2022: -4.0; 2023: -3.9; 2024: -7.4; 2025–2030: -4.0, -3.5, -3.0, -2.5, -2.0, -1.5.
- Central Government (selected):
  - Revenues and grants (percent of GDP): 2022: 12.1; 2023: 12.7; 2024: 11.0; 2025–2030: 11.6, 12.0, 12.3, 12.9, 13.5, 13.7.
  - Total Expenditure (percent of GDP): 2022: 16.3; 2023: 16.7; 2024: 18.9; 2025–2030: 17.5, 17.0, 16.9, 17.0, 16.6, 16.6.
  - Overall Balance (percent of GDP): 2022: -4.1; 2023: -4.0; 2024: -7.9; 2025–2030: -5.8, -5.1, -4.6, -4.0, -3.5, -3.0.
  - Primary balance (percent of GDP): 2022: -2.4; 2023: -1.4; 2024: -4.9; 2025–2030: -2.3, -1.9, -1.6, -1.2, -0.6, -0.2.
- Panama Canal Authority (ACP) transfers and role:
  - Panama Canal fees and dividends (percent of GDP): constant 3.0 in 2022–2030 entries where reported in tables.
  - ACP-specific balances: ACP overall balance projections show small surpluses (e.g., 2022: 0.8; 2023: 0.8; 2024: 0.7; 2025–2030: 1.0, 1.2, 1.2, 1.3, 1.3, 1.4).

### Public debt and debt dynamics
- Non-Financial Public Sector gross debt (percent of GDP): 2022: 52.7; 2023: 51.5; 2024: 57.6; 2025–2030: 59.5, 60.2, 60.5, 60.2, 59.4, 58.2.
- Net debt (percent of GDP): 2022: 50.8; 2023: 49.2; 2024: 55.7; 2025–2030: 58.4, 59.5, 60.1, 60.0, 59.4, 58.3.
- Central government gross debt components (percent of GDP):
  - Domestic: 2022: 9.7; 2023: 8.4; 2024: 11.0; 2025–2030: 12.7, 14.1, 15.0, 16.0, 16.9, 17.6.
  - External: 2022: 48.2; 2023: 48.0; 2024: 51.3; 2025–2030: 52.5, 52.3, 52.3, 51.3, 50.1, 48.6.
- Financial assets and sovereign wealth fund (percent of GDP):
  - Financial assets: 2022: 7.0; 2023: 7.2; 2024: 6.6; 2025–2030: 6.7, 6.9, 7.2, 7.4, 7.6, 7.8.
  - Sovereign Wealth Fund (FAP): 2022: 1.7; 2023: 1.8; 2024: 1.9; 2025–2030: 2.2, 2.4, 2.7, 3.0, 3.3, 3.7.
- Memorandum items:
  - Net Debt as defined under SFRL (percent of GDP): 2022: 51.0; 2023: 49.7; 2024: 55.7; 2025–2030: 57.4, 57.8, 57.7, 57.2, 56.1, 54.6.

### External sector, balance of payments, and vulnerabilities
- Current account balance (percent of GDP): 2022: 0.0; 2023: -3.1; 2024: 1.9; 2025–2030: -0.9, -1.8, -2.5, -2.5, -2.5, -2.5.
- Merchandise trade, net (percent of GDP): 2022: -8.8; 2023: -11.8; 2024: -7.0; 2025–2030: -9.2, -10.1, -11.4, -11.8, -12.2, -12.7.
  - Colón Free Zone and Export Processing Zones contribution: 2022: -0.2; 2023: -4.3; 2024: 2.4; 2025–2030: 2.1, 1.2, 0.5, 0.5, 0.5, 0.5.
- Services, net (percent of GDP): 2022: 12.8; 2023: 14.2; 2024: 14.5; 2025–2030: 15.1, 15.7, 16.5, 17.0, 17.5, 17.9.
  - Travel, net: 2022: 4.9; 2023: 5.1; 2024: 5.5; 2025–2030: 5.5, 5.7, 5.8, 5.9, 6.0, 6.1.
  - Transportation, net (including Canal): 2022: 6.9; 2023: 7.8; 2024: 7.6; 2025–2030: 8.1, 8.4, 8.9, 9.2, 9.5, 9.8.
- Income (net, percent of GDP): 2022: -4.0; 2023: -5.5; 2024: -5.6; 2025–2030: -6.9, -7.5, -7.6, -7.7, -7.8, -7.8.
- Financial account (percent of GDP): 2022: -6.5; 2023: -3.5; 2024: -3.4; 2025–2030: -4.5, -4.4, -5.1, -4.0, -3.7, -3.5.
  - Foreign direct investment, net (percent of GDP): 2022: -3.0; 2023: -1.7; 2024: -2.8; 2025–2030: -2.9, -2.8, -2.7, -2.6, -2.6, -2.5.
  - Portfolio investment, net (percent of GDP): 2022: -4.3; 2023: -1.7; 2024: 0.8; 2025–2030: 0.8, 0.7, 0.2, 0.5, 0.6, 0.5.
- External debt (Non-Financial Public Sector, percent of GDP): 2022: 46.7; 2023: 46.6; 2024: 50.0; 2025–2030: 51.2, 51.1, 51.1, 50.3, 49.1, 47.6.
- Gross international reserves (millions of US$): 2022: 6,876; 2023: 6,757; 2024: 6,856; 2025–2030: 7,097, 7,405, 7,732, 8,079, 8,447, 8,837.
- External vulnerability indicators (selected):
  - Merchandise exports (12-month percent change): 2022: 21.3; 2023: -1.5; 2024: -5.1; 2025–2030: -3.2, -3.2, -3.2, 0.8, 0.7, 0.7.
  - Merchandise imports (12-month percent change): 2022: 34.0; 2023: 10.6; 2024: -16.3; 2025–2030: 6.6, 2.7, 5.0, 4.6, 4.5, 4.7.
  - Gross international reserves in months of imports of goods and services: 2022: -3.9; 2023: -5.3; 2024: -5.4; 2025–2030: -6.9, -7.5, -7.6, -7.7, -7.8, -7.8.

### Financial sector and banking system
- Banking system totals (in millions of US$ at end of period):
  - Net foreign assets: 2022: 6,290; 2023: 7,286; 2024: 8,450; 2025–2030: 8,810, 9,191, 9,620, 10,069, 10,535, 11,017.
  - Net domestic assets: 2022: 40,876; 2023: 41,486; 2024: 45,851; 2025–2030: 45,683, 48,615, 51,701, 54,980, 58,469, 62,182.
  - Private sector credit (in millions of US$): 2022: 57,758; 2023: 59,775; 2024: 62,112; 2025–2030: 65,212, 69,177, 73,383, 77,845, 82,578, 87,599.
  - Total deposits (in millions of US$): 2022: 46,787; 2023: 48,466; 2024: 51,041; 2025–2030: 53,589, 56,847, 60,303, 63,970, 67,859, 71,985.
- Financial soundness indicators (selected, end-of-period):
  - Regulatory capital to risk-weighted assets: 2015: 14.9; 2016: 15.3; 2017: 16.0; 2018: 15.7; 2019: 15.2; 2020: 15.7; 2021: 15.8; 2022: 15.3; 2023: 15.1; 2024Q3: 15.7.
  - Nonperforming loans to total gross loans: 2015: 2.2; 2016: 2.5; 2017: 3.1; 2018: 3.3; 2019: 2.0; 2020: 2.0; 2021: 2.3; 2022: 2.5; 2023: 2.6; 2024Q3: 2.4.
  - Return on assets: 2015: 1.5; 2016: 1.3; 2017: 1.6; 2018: 1.6; 2019: 1.5; 2020: 0.7; 2021: 1.0; 2022: 1.4; 2023: 1.9; 2024Q3: 2.0.
  - Provisions to nonperforming loans: 2015: 35.9; 2016: 41.2; 2017: 38.3; 2018: 53.7; 2019: 102.4; 2020: 148.0; 2021: 173.7; 2022: 138.6; 2023: 123.2; 2024Q3: 122.6.
  - Customer deposits to total (noninterbank) loans: 2015: 85.3; 2016: 83.1; 2017: 82.5; 2018: 80.8; 2019: 81.5; 2020: 89.4; 2021: 111.5; 2022: 102.9; 2023: 103.2; 2024Q3: 99.6.

### Projections, social indicators, and memoranda
- Population (millions, 2024): 4.5; Population growth rate (percent, 2024): 1.3.
- Poverty line (percent, 2019): 21.5; Adult literacy rate (percent, 2019): 95.7; Life expectancy at birth (years, 2022): 76.2.
- GDP per capita (US$, 2024): 19,169.
- Total unemployment rate (Oct, 2024): 9.5.
- IMF Quota (SDR, million): 376.8.
- GDP (in millions of US$), selected years: 2022: 76,523; 2023: 83,382; 2024: 86,260; 2025: 90,566; 2030: 121,655.
- Exports of goods and services (in millions of US$), selected: 2022: 35,717; 2023: 37,905; 2024: 37,376; 2025: 38,215; 2030: 47,482.
- Imports of goods and services (in millions of US$), selected: 2022: 32,646; 2023: 35,927; 2024: 30,887; 2025: 32,833; 2030: 41,004.

*Sources: National Authorities; WEO database; Haver; INEC; Comptroller General; Superintendency of Banks; National Bank of Panama; Ministry of Economy and Finance; and IMF staff calculations.*

### 1.      Panama’s pension system needed to be reformed. Before the 2025 reform, the system

### Panama’s pension system needed to be reformed. Before the 2025 reform, the system

### Panama’s pension system before 2005
- System structure and administration:
  - Operated primarily as a PAYG defined benefit (DB) scheme managed by the CSS (Established in 1941).
  - CSS administered pensions for old age, disability, and survivors.
- Eligibility and benefit formula:
  - Retirement age: 62 for men and 57 for women.
  - Retirees received 60 percent of their average monthly earnings from their best 10 years, with an additional 1.25 percent for each year of contributions beyond 20 years.
- Contribution rates and structural deficiencies:
  - Contribution rates of 6.75 percent for employees and 2.75 percent for employers were insufficient.
  - Benefit calculations based on highest-earning years (best 10 years) produced disproportionately high payouts.
  - Early retirement policies allowed replacement of 80 to 100 percent of pre-retirement wages for some workers.
- Coverage and governance challenges:
  - Large informal economy left many workers outside the pension system, reducing the funding base.
  - Weak compliance among some employers and employees.
  - Political interference and administrative inefficiencies at the CSS led to poor financial management and weak investment strategies.
- Actuarial outlook:
  - By the early 2000s, actuarial projections indicated the pension system was heading toward insolvency without reform.

### The 2005 pension reforms
- Core change: creation of a Mixed Scheme alongside the DB Scheme:
  - DB Scheme: continued PAYG for older workers; workers older than 35 as of January 1, 2006, remained in this scheme.
  - Mixed Scheme: applied to workers aged 35 or younger as of January 1, 2006, who could voluntarily switch by December 31, 2007; enrollment mandatory for new workers from 2008.
- Mixed scheme structure:
  - DB Pillar—Minimum Guarantee:
    - Pension floor: 0 percent of the base salary (the average salary of the ten highest contributory years, capped at 500 dollars per month), plus 1.2 percent for each year of contributions beyond 20 years.
    - Qualification: at least 240 monthly contributions (i.e., contributed over 20 years).
  - DC Pillar:
    - Employee and employer contributions placed in individual accounts, earned returns per CSS investment policy, converted into an annuity at retirement.
    - At payout, retiree received whichever was higher: the DB–pillar guarantee (60 percent plus 1.25 percent multiplied by extra years) or the DC–account annuity.
- Contribution increases (phased to 2010):
  - Employee contributions increased from 6.75 to 9.25 percent of wages.
  - Employer contributions increased from 2.75 to 4.25 percent.
- Benefit calculation change:
  - DB scheme pensions recalculated based on career-average earnings rather than peak earnings.
  - Mixed-scheme DC pensions: accumulated contributions and investment returns divided by actuarially determined life expectancy at retirement; incorporates a discount rate defined by the CSS; cannot be less than the DB pillar benefit.

### Challenges remaining after the 2005 reforms
- Depletion of the DB scheme due to demographic shifts and fewer active contributors.
- Surpluses in the mixed scheme because younger workers contributed without currently receiving benefits.
- Legal restriction: prohibition on using surplus funds from the DC scheme to subsidize the DB scheme, deepening DB liquidity challenges.
- Informal sector and narrow contribution base limited sustainability.

### New pension reforms — Law 462 (March 2025)
- Overview:
  - Law 462 of March 2025 modifies Law 51 of 2005; retirement ages remain unchanged (57 years for women and 62 years for men). An actuarial review is scheduled in six years.
- Creation of a third scheme: SUCGS (Sistema Único de Capitalización con Garantía Solidaria)
  - Two components:
    - Contributory Component of Solidarity Capitalization: pensions based entirely on accumulated individual account amounts; converted to pension using a fixed formula.
      - Formula: (accumulated balance / 1,000) × an actuarial factor (varies by age and gender).
    - Non-Contributory Solidarity Component: minimum benefit pension (solidarity benefit pension) may be assigned as a top-up if accumulated funds are insufficient, subject to contribution thresholds and criteria.
      - Those with fewer than 120 pension contributions receive the earned/calculated pension amount even if below the minimum of $144.
      - Those with 120-240 contributions and a calculated pension below $144 are guaranteed a minimum pension of $144.
      - For those with more than 240 contributions, if the calculated pension is above $144 but below the guaranteed solidarity pension, a top-up will be added to match the guaranteed solidarity pension amount.
      - Guaranteed solidarity pension equals 1.84 times the guaranteed minimum pension ($144).
      - These pensions are for life and indexed annually based on the CPI or the moderate urban poverty line, capped at 3 percent per year.
- Transition stages to SUCGS:
  - First stage (pre-2008 entrants in DB scheme): remain under old Law 1 rules until March 1, 2036; on that date CSS will cease paying old-age compensation under Law 51 and replace it with the minimum pension under the new system; CSS will recalculate all remaining DB pensions under the new capitalization formula, migrating legacy DB beneficiaries into SUCGS.
  - Second stage (mixed-scheme participants who entered between 2008 and March 18, 2025): one-year election window until March 18, 2026 to opt into SUCGS (choice irrevocable); those not opting in will be automatically transferred on March 1, 2036.
  - Third stage: all workers hired on or after March 18, 2025, are enrolled in SUCGS from day one.
- Self-employed participation:
  - Self-employed must contribute 9.36 percent of their taxable income for disability, old age, and death benefits, with an additional 8.5 percent optional contribution for health and maternity coverage.

### Contribution rate changes and fiscal support
- Employer contributions:
  - Increase from 4.25 percent to 7.25 percent.
  - Increase occurs in three steps of one percentage point in March 2025, March 2027, and March 2029.
- Employee contributions:
  - Remain unchanged at 9.2 percent.
- Merging assets into Single Solidarity Fund (SSF):
  - Reform creates SSF to finance benefits across legacy DB, mixed scheme, and SUCGS.
  - Current reserves of the legacy mixed scheme and defined-benefit scheme allocated to the SSF.
  - Mixed scheme reserves can be used to pay DB pensions; mixed scheme currently holds reserves of approximately $  billion (figure left as in source).
  - Integrating reserves projected to result in a balance of about 9.5 percent of GDP in 2025.
- State fiscal contribution:
  - Central government will provide a fiscal contribution of $966 million to the SSF.
  - This contribution will be increased annually by up to 4 percent.
  - Transfer timing: payment either as a single annual payment or according to an agreement between MEF and CSS, but no later than December 31 of each fiscal year.

### Benefit rules and guarantees under SUCGS
- Treatment of past contributions:
  - Current DB participants: all past contributions (15 percent of salary, capped at $2,500 per month) capitalized in an individual account with a guaranteed 4 percent annual yield; converted into a monthly annuity using age-and-gender actuarial factor prescribed in Article 160 of Law 462.
  - Contributions made after March 1, 2025 (13.5 percent of salary plus 1 percent of the “13th month” bonus) accumulate and earn actual SSF returns.
  - If SUCGS annuity falls below what retiree would have received under Law 51 DB formula, CSS pays the higher legacy benefit (no DB participant loses ground).
- Mixed-scheme participants:
  - Past DB contributions (up to the $500 salary cap) capitalized at 4 percent and annuitized via actuarial factor; SUCGS guarantees at least the DB-pillar benefit under old mixed formula (60 percent replacement of base salary plus 1.25 percent per excess year).
  - DC account balances remain intact and continue to grow with SSF returns; retiree’s total SUCGS pension equals the converted DB-capitalized annuity plus the DC-account annuity.
  - CSS tops up if combined figure is below legacy mixed scheme payment.
  - Post-March 18, 2025 DC contributions accrue at actual SUCGS fund return and are converted at 100 percent of the accumulated balance into an annuity (removing extra actuarial discount previously applied).
- New entrants (from March 18, 2025 onward):
  - Enrolled as solo capitalization members; contributions (13.5 percent of salary plus the 18 percent of bonus) accumulate in individual account and earn actual SSF returns.
  - At retirement, entire balance converted into an annuity via age-and-gender actuarial factor.
  - A hard replacement-rate floor of 60 percent of the retiree’s reference base salary ensures a minimum pension.
- Core guarantees across all groups:
  - “No-loss” rule (Art. 111): any SUCGS annuity below legacy entitlement topped up to the higher legacy amount.
  - Universal 60 percent replacement-rate floor of reference base salary applies to everyone.

### Revisions to CSS investment framework
- Asset allocation limits and rules:
  - CSS may invest up to 75 percent of its assets in government bonds (Panamanian sovereign debt—domestic and international—and U.S. investment-grade sovereign bonds).
  - Maximum exposure of 15 percent to any single foreign issuer.
  - Reserves for IVM must be confined to very low-volatility instruments (government securities and bank deposits).
  - Alternative Assets envelope: up to 10 percent of total reserves for real estate and infrastructure, financed from designated sub-funds.
- External management and custody:
  - Commission on Risks and Investments may appoint external fund managers via public prequalification.
  - CSS may outsource up to 10 percent of total reserves to external managers; no single manager may be assigned more than 20 percent of the externally managed portion.
  - All securities must be held by custodians registered with the Superintendency for Securities Markets.
- Governance and liability:
  - CSS must follow the prudent person rule, balancing capital preservation with return objectives.
  - Compliance required for sustainability, AML/CFT, and nonproliferation requirements.
  - CSS officials subject to civil or criminal liability for breaches of responsibilities.

*Prepared by Olusegun Akanbi. International Monetary Fund.*

### 1.      The Panama Canal (“the Canal”) is a critical maritime passage that links the Atlantic

### The Panama Canal: operations, drought impacts, expansions, and economic role

### Overview
- The Panama Canal “the Canal” links the Atlantic and Pacific Oceans and facilitates 6 percent of global maritime trade.
- Over 13,000 ships transit its waters annually, carrying more than 500 million tons of cargo.

### Canal operations, lock system, and water dependence
- The Canal is not a sea-level canal; it operates through a lock system filled from two artificial reservoirs: Lake Gatún and Lake Alajuela.
- Each transit uses on average 200 million liters of water, equivalent to the contents of 80 Olympic-size swimming pools.
- The reservoirs also provide drinking water for more than 50 percent of the country.

### 2023–24 drought, operational impacts, and recovery
- The Canal was hit by a drought in 2023–24, triggered by El Niño, which reduced water levels in Gatún Lake.
- The ACP reported the average November water level at Gatún Lake over the past five years was 86.7 feet; in November 2023, its depth decreased to 79.8 feet.
- Operational responses by the ACP:
  - Reduced number of daily transits from a normal 36 to 38 per day to 22 to 26 per day between October 2023–March 2024.
  - Lowered the maximum allowed draft to 44 ft, down from the regular  0 ft, reducing some large ships’ loads by up to 40 percent.
  - Restrictions were gradually lifted from April 2024 as the rainy season began; by September 2024 the Canal had returned to operating at full capacity.

### Past expansions and capacity changes
- Between 2000 and 2024, Panama invested appro imately $ 5 billion in the Canal’s operation and development, with a significant portion directed toward the Panama Canal Expansion Program.
- Neopanamax locks (completed in 2016) cost $5.2 billion and allowed the Canal to accommodate ships up to:
  - 1,200 feet (366 meters) long,
  - 168 feet (51 meters) wide,
  - capable of carrying up to 14,000 containers—nearly three times the capacity of original Panamax vessels.
- New throughput records:
  - In August 2023, the largest ship ever to transit carried 17,640 TEU.
- Financial effects post-expansion:
  - Between 2016 and 2024, toll revenue grew at an average rate of 7.5 percent, surpassing the country’s nominal GDP growth of  .4 percent.
  - The toll per ton in real terms has stayed the same as in the late 2010s, suggesting gains came from moving more goods rather than higher toll rates.

### Pricing and competitiveness
- In 2022, the ACP introduced dynamic pricing with three components: a minimum fixed rate determined by the lock system (Panamax or Neopanamax), a fixed fee based on vessel type and size (for most types using the PC/UMS), and a variable charge that adjusts with supply and demand conditions.
- Example tariff comparison:
  - A fully loaded Neopanamax vessel with a 10,000 TEU capacity pays approximately $720,000, or $72 per TEU.
  - A similarly sized vessel transiting the Suez Canal would pay around $575,000 or $5.75 per SCNT ($57.5 PER TEU); the Suez Canal is a sea-level canal and significantly cheaper to operate.

### Rio Indio Reservoir Project (drought resilience)
- To secure water supply and mitigate future droughts, the ACP is advancing the $1.6 billion Rio Indio Reservoir Project.
- Project features and expectations:
  - Create a third reservoir with a capacity of 1.25 billion cubic meters.
  - Provide a steady and reliable freshwater supply during droughts, improve storage, distribution and reuse of water, and increase drinking water supply.
  - Expected to allow the Canal to maintain the usual 36–38 transits per day during droughts.
  - Project is under review and, if approved, expected to be completed by 2030 or 2031.
  - It is likely that at least one more El Niño will occur before then.

### The Canal’s contribution to Panama’s economy
- The Canal is one of the key engines of Panama’s economy:
  - The Canal accounts for approximately  percent of Panama’s GDP, with  4 percent derived from tolls and 36 percent from ancillary services, including cargo handling, ship repairs, and tourism.
  - The logistics sector contributed 11.5 percent to GDP in 2023.
  - The Canal and its interactions with other sectors generate almost 55 thousand jobs, equivalent to 2.9 percent of total employment.
  - The Canal accounts for 32 percent of total services exports and 25 percent of exports of services and domestically produced goods.
  - In 2023, Panama received $2.3 billion in FDI, with logistics and finance among the primary investment sectors.
- Government revenues and distributions:
  - On average, about 3 percent of GDP in government nontax revenues come from the Canal.
  - Tolls have accounted for about 1.9 percent of GDP annually, while remaining revenues are about 1.1 percent of GDP from related sectors.
  - Since 2014, distributions have reached close to $20bn.
  - An IDB study for 2022 estimated that 23.6 percent of the government's annual income is explained by the total contribution of the Canal's activity.

### Governance, FDI trends, and reforms to attract investment
- FDI dynamics:
  - FDI inflows to Panama have slowed significantly since 2019; without major new drivers, FDI inflows are expected to settle around 2-4 percent of GDP annually, compared with 7–9 percent of GDP pre-2019.
- Areas to strengthen to attract FDI:
  - Reinforce anti-corruption legislation and enforcement mechanisms.
  - Strengthen the rule of law, including judicial independence and efficiency of the justice system.
  - Refine appointment processes for senior government and state institution positions to emphasize merit and technical expertise.
  - Enhance transparency in fiscal management, including broader access to high-quality fiscal data.

### Implementation of past IMF policy advice (selected points)
- Fiscal policy:
  - A revised SFRL has been adopted, and initiatives to support revenue mobilization include the launch of a new LTU in July 2023 and new scanners at customs checkpoints.
  - A comprehensive, annual tax expenditure review remains pending.
- Financial integrity and tax transparency:
  - In October 2023, the FATF removed Panama from the grey list after remaining issues were addressed.
  - Further steps encouraged by FATF include enhancing UBO registry searchability and increasing the use of financial intelligence products; sectoral risk assessments of FinTech and virtual asset service providers are needed.
- Financial sector soundness:
  - Authorities are implementing 2023 FSAP recommendations, undertaking stress tests, adopting a Capital Conservation Buffer regulation phased in by 2026, and preparing a capital surcharge for D-SIBs in 2025.
  - The Financial Stability Report is now published twice a year and includes wider regulator contributions.
- Data and statistics:
  - Implementation of the National Statistical Plan 2021-25 continues; a recent GDP rebasing was completed.
  - External sector statistics improved somewhat with support from STA, reducing errors and omissions.

*Prepared by Maylin Sun. Source: IMF chapter on Panama (text provided).*

### 6.      Structural Reforms. The food and fuel subsidies that were introduced in 2022 have been

### 6.      Structural Reforms

### Key reforms and initiatives
- The food and fuel subsidies that were introduced in 2022 have been phased out, as recommended by the Fund.
- The increase in the minimum wage of 4.5 to 7 percent in 2024, to an average minimum salary of US$636.8, will continue to support the most vulnerable to cope with inflation.
- To improve resilience to natural disasters and droughts, the Ministry of Environment in 2023 presented a plan to improve the management of hydric resources in Panama, which inter alia aims at:
  - identifying national priorities,
  - accelerating the implementation of mitigation measures, and
  - supporting their internal and external financing processes.

### Risk Assessment Matrix — major external risks (selected)
- Trade policy and investment shocks
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: reduced external trade, disrupted FDI and supply chains, further U.S. dollar appreciation, tighter financial conditions, and higher inflation.
  - Policy responses:
    - Pursue adequate liquidity and fiscal buffers to safeguard macroeconomic and financial stability.
    - Use such buffers to safeguard macroeconomic and financial stability if needed, albeit accompanied by a credible Medium-Term Fiscal Framework (MTFF) and credible plan to return to the deficit targets.
    - Continue efforts to diversify key export markets.
    - Ensure that social transfers and subsidies are well targeted to the poor and needy, in a manner consistent with debt sustainability and the SFRL.
    - Enhance the safety net and crisis preparedness for the financial sector.

- Sovereign debt distress
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: capital outflows, rising risk premia, loss of market access, abrupt expenditure cuts, and lower growth in highly indebted countries.
  - Policy responses:
    - Pursue prudent fiscal policies to preserve debt sustainability and continue strengthening fiscal policy credibility.
    - Deepen domestic financial markets.
    - Maintain transparency, open communications, and active outreach toward international market participants.
    - Improve crisis preparedness, including by reforming the crisis management and resolution framework.

- Deepening Geo-Economic Fragmentation
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: higher input costs, hindered green transition, and lower trade and potential growth.
  - Policy responses:
    - Continue efforts to diversify key export markets.
    - Advance structural reforms to improve productivity and strengthen competitiveness, including through sustained efforts to improve education and governance.

- Cyberthreats
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: Medium
  - Policy responses:
    - Improve legal and institutional frameworks for cybersecurity; devise a centralized plan and common rules to combat cyberattacks more effectively.
    - Enhance risk monitoring and supervision of banking institutions to ensure systems and processes mitigate cyber-security risks.

- Commodity Price Volatility
  - Likelihood: Medium; Time Horizon: ST; Expected Impact: High
  - Policy responses:
    - Allow the current account to adjust through lower non-oil imports.
    - Ensure social transfers and subsidies to soften the impact are well targeted to the poor and needy, consistent with debt sustainability and the SFRL.

- Global growth acceleration
  - Likelihood: Low; Time Horizon: ST, MT; Expected Impact: Medium
  - Policy response:
    - Use positive growth surprises to build fiscal buffers and, when feasible, accelerate the reform agenda.

- Note on RAM probabilities: “low” = below 10 percent, “medium” = between 10 and 30 percent, and “high” = between 30 and  0 percent. The RAM reflects staff views on risk sources and overall concern as of the time of discussions with the authorities. ST and MT denote the short-term (within 1 year) and medium-term (within 3 years), respectively.

### Risk Assessment Matrix — major domestic risks (selected)
- Setbacks in Fiscal Consolidation Necessary to Adhere to the new SFRL Limits
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: deterioration of fiscal credibility, reduced market confidence, higher borrowing costs, and impacts on debt sustainability.
  - Policy responses:
    - Adhere to the deficit targets set in the medium-term plan, as confirmed in the new SFRL, supported by explicit projections and measures for revenues and expenditures.
    - Reform tax and customs administration.
    - Strengthen the fiscal framework.

- Social Discontent (Panama-specific)
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: financing pressures, populist policies, exacerbated imbalances, slower growth, and market repricing.
  - Policy responses:
    - Ensure social welfare and transfer programs are well targeted and reach the poor and those most in need.
    - Develop clear communication and engagement strategies with affected communities, taking into full consideration direct and indirect distributional effects in policy decisions.
    - Address governance and corruption vulnerabilities.

- Loss Of Investment Grade Status
  - Likelihood: High; Time Horizon: ST, MT; Expected Impact: High
  - Expected effects: higher financing costs, refinancing risks, reduced FDI and portfolio flows, and selloffs in bond and equity markets.
  - Policy responses:
    - Adhere to deficit targets in the medium-term plan and the new SFRL, with explicit revenue and expenditure measures.
    - Reform tax and customs administration.
    - Address governance and corruption vulnerabilities.

- Droughts
  - Likelihood: High; Time Horizon: MT; Expected Impact: Medium
  - Expected effects: delays and Canal restrictions with spillovers to the global shipping industry, lower hydro-energy generation and lower agricultural production.
  - Policy responses:
    - Continue efforts to build resilience against, and limit the potential disruptions caused by, droughts.
    - Proceed with necessary investments to maintain the Canal’s operations during future droughts.

- Sharp Correction in Residential and Commercial Property Markets
  - Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: High
  - Policy responses:
    - Strengthen monitoring of systemic risk.
    - Further develop the macroprudential policy framework and strengthen financial sector crisis preparedness.

### Climate and disaster resilience priorities
- Continue efforts to build resilience and limit disruptions caused by natural disasters, including the impact of droughts on the Panama Canal’s operations, focusing on structural, financial, and post-disaster resilience.
- Prepare a Disaster Resilience Strategy (DRS) based on a multi-year macro-fiscal framework, with input from stakeholders, to provide development partners with a comprehensive guide to the authorities’ needs and plans, and to facilitate coordination of their support.
- Ensure social transfers and subsidies to deal with climate impacts are well targeted to the poor and needy, in a manner consistent with debt sustainability and the SFRL.

*Source: 1panea2025001-source-pdf - 6. Structural Reforms.*

### 1.9 percent of GDP in 2024 (from a revised deficit of 3.1 percent of GDP in 2023), on the back of the re-exports of good

### 1.9 percent of GDP in 2024 (from a revised deficit of 3.1 percent of GDP in 2023), on the back of the re-exports of good

### Current account: recent outturns and drivers
- Overall current account deficit: 1.9 percent of GDP in 2024 (from a revised deficit of 3.1 percent of GDP in 2023), driven by re-exports of goods stored in the CFZ and EPZs.
- Current account deficit excluding the CFZ and EPZs: 0.4 percent of GDP in 2024, down from a surplus of 1.2 percent of GDP in 2023, amid the end of copper exports following the Cobre Panamá shutdown.
- Over the last decade: underlying current account deficit improved from a deficit of 13 percent of GDP in 2011, associated with declining imports as the construction boom eased.
- Data caveats: models could be affected by data issues, including large errors and omissions in the BoP data, but staff views these issues as not affecting the overall assessment.

### Current account: projections and model assessment
- Projected current account (excluding CFZ and EPZs): widen from 0.4 percent in 2024 to 3 percent of GDP in 2025 in the absence of copper exports (except existing stock of copper concentrate worth about $300 million).
- Medium-term projection: overall current account deficit projected to slightly deteriorate to around 2½ percent of GDP as re-exports from the CFZ and EPZs return to normal.
- EBA-lite CA model:
  - Implied current account norm: -1.1 percent of GDP.
  - Current account gap: 0.4 percent of GDP.
  - Policy gap: -0.4 percent of GDP (given Panama’s fiscal balance deviation from its desirable level was larger than the rest of the world’s deviation).
- Staff assessment: Panama’s external position broadly consistent with fundamentals and desirable policies.

### Foreign assets and liabilities: position and composition
- Net International Investment Position (NIIP): -89.4 percent of GDP at end-2024 (up from -100.  percent of GDP in 2021).
- Gross assets: 130.  percent of GDP in 2024 (majority accounted for by banks as foreign deposits and loans and debt securities).
- Gross liabilities: 219.9 percent of GDP at end-2024 (down from 23 .2 percent of GDP in 2021).
- External debt: about 1 4.7 percent of GDP.
- Non-debt FDI liabilities: about 50.3 percent of GDP.
- Intracompany lending (FDI): 31.  percent of GDP.
- Banks’ external debt: mostly in the form of deposits; banks account for the largest share of external debt.
- Staff assessment: large share of banking sector liabilities reflects Panama’s position as a financial hub; bulk of banks’ debt is deposits and the counterpart to banks’ large gross external assets.

### External position: tabulated 2024 (% GDP) figures
- NIIP: -89.4
- Gross Assets: 121.1
- Debt Assets: 108.6
- Gross Liabilities: 219.9
- Debt Liabilities: 164.7

### Real exchange rate (REER) and nominal effective exchange rate (NEER)
- REER: remained broadly stable in 2024, depreciating by 0.3 percent on average relative to 2023, to 1.0 percent below the 2020–23 average.
- NEER: appreciated by 2.  percent on average relative to 2023.
- Low inflation in Panama relative to peers contributed to REER depreciation.
- EBA-lite CA model implies REER undervaluation of 1.3 percent.
- Staff assessment: 2024 REER gap in the range of 0 to 6 percent.

### Capital and financial accounts: flows and financing assessment
- Net FDI inflows: increased from 1.7 percent of GDP in 2023 to 2.8 percent in 2024 (outward FDI increased; reinvestment of earnings declined).
- Portfolio investment inflows: increased in 2024 as government issuance increased.
- Staff assessment: over the medium term, current account deficit expected to remain adequately financed by FDI. Panama’s role as a maritime and air transportation hub and regional financial center, along with macroeconomic stability, should continue to attract substantial investment, though in lower volumes relative to GDP than during the 2010s.
- Risks and offsets: any decline in FDI receipts would likely be partly offset by a reduction of outflows in the primary income account, limiting overall impact on Panama’s ability to finance imports.

### FX intervention, reserves, and liquidity buffers
- Panama: fully dollarized economy with no central bank.
- Standard ARA metric: inappropriate due to lack of authorities’ control over banks’ foreign exchange liquidity.
- Statistical measure of international reserves: net foreign assets of the National Bank of Panama and the Ministry of Economy and Finance.
- B P’s net foreign assets: decreased from  .7 percent of GDP in 2021 to  .  percent of GDP in 2024, reflecting payment of external obligations.
- Staff assessment: Panama’s reserve level is adequate; reserves spiked during the pandemic and have since normalized.
- Central government deposits at commercial banks: corresponded to 1.  months of central government expenditures at end-2024 (well above best practice of 1 month of expenditure).
- Sovereign Wealth Fund: holds about 2 percent of GDP in foreign assets abroad.
- Banking sector liquidity: liquid assets covered  4.7 percent of short-term deposits at end-December 2024 (nearly double the minimum statutory requirement of 30 percent), reflecting high liquidity buffers.

### External debt dynamics, sustainability, and risk of sovereign stress
- External debt and projections (selected indicators from the DSA tables and text):
  - Baseline: External debt around 159.7 percent of GDP in the debt-stabilizing scenario (table contexts).
  - External debt-to-exports ratio examples: 342.7 to 409.1 (historic and projected range shown in table).
  - Gross external financing need (in billions of US dollars) examples: 50.9, 47.2, 46.0, 41.5, 43.5, 46.2, 54.2, 53.1, 55.6, 59.4, 63.4, 67.6, 71.2, 74.6 (table entries).
- Risk of sovereign stress: overall assessment—Moderate.
  - Near-term: Moderate. Recent suspension of arbitration by First Quantum could reopen the mine, boosting tax revenues; recent sovereign downgrades increase borrowing cost risks. Government plans to reduce fiscal deficit in 2025 and medium term, if implemented, will help mitigate stress.
  - Medium-term: Moderate. Fiscal consolidation reduced fiscal deficit from 10 percent of GDP in 2020 to 3.9 percent in 2023, was partially reversed in 2024 with deficit rising to 7.4 percent of GDP. Missing 2025 fiscal target would increase risk of losing investment-grade status. Credible medium-term fiscal strategy aligned with SFRL fiscal rule targets and sustained growth expected to help manage debt-to-GDP ratio. Failure of mine negotiations and arbitration outcomes pose significant risks.
  - Long-term: Moderate. Vulnerabilities from uncertainties on future growth sources, climate change-related impacts on the Panama Canal, fiscal consolidation, and reform implementation.
- DSA sustainability assessment: Debt projected to stabilize with GFNs at manageable levels, contingent on a credible multi-year plan to meet amended fiscal rule targets. Debt assessed as sustainable with high probability.
- Liquidity and financing risks: Medium-term liquidity risks moderate; financing and debt dynamics vulnerable to uncertainties. External financing needs and non-resident debt share remain elevated due to Panama’s role as a US-dollar-based regional financial center. Potential loss of investment-grade status and global capital market disruptions could pressure external sovereign debt rollover.
- Policy implication: Panama needs to rebuild fiscal buffers through enhanced revenue mobilization.

*Source: Fund staff.*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors:

### Public debt baseline projections
- Public debt (Percent of GDP) — Actual/Projected:
  - 2024: 57.6
  - 2025: 59.5
  - 2026: 60.2
  - 2027: 60.5
  - 2028: 60.2
  - 2029: 59.4
  - 2030: 58.2
  - 2031: 56.4
  - 2032: 54.7
  - 2033: 53.0
  - 2034: 51.5
- Change in public debt (Percent of GDP): 6.1 (2024), 2.0 (2025), 0.7 (2026), 0.3 (2027), -0.3 (2028), -0.8 (2029), -1.2 (2030), -1.8 (2031), -1.7 (2032), -1.6 (2033), -1.5 (2034).
- Contribution of identified flows (Percent of GDP): 2.5 (2024), 1.8 (2025), 0.7 (2026), 0.2 (2027), -0.3 (2028), -0.8 (2029), -1.2 (2030), -1.8 (2031), -1.7 (2032), -1.6 (2033), -1.5 (2034).
- Primary deficit (Percent of GDP): 4.5 (2024), 0.5 (2025), 0.3 (2026), 0.0 (2027), -0.3 (2028), -0.8 (2029), -1.3 (2030), -1.2 (2031), -1.1 (2032), -1.0 (2033), -0.9 (2034).
- Noninterest revenues (Percent of GDP): 15.8 (2024), 17.7 (2025), 18.0 (2026), 18.4 (2027), 18.4 (2028), 18.9 (2029), 19.5 (2030), 19.7 (2031), 20.0 (2032), 20.0 (2033), 20.0 (2034).
- Noninterest expenditures (Percent of GDP): 20.3 (2024), 18.2 (2025), 18.4 (2026), 18.4 (2027), 18.4 (2028), 18.6 (2029), 18.6 (2030), 18.4 (2031), 18.8 (2032), 19.0 (2033), 19.1 (2034).
- Automatic debt dynamics (Percent of GDP): -0.8 (2024), 0.8 (2025), -0.3 (2026), -0.4 (2027), -0.6 (2028), -0.6 (2029), -0.6 (2030), -0.6 (2031), -0.6 (2032), -0.6 (2033), -0.6 (2034).
- Real interest rate and relative inflation (Percent): 0.7 (2024), 3.3 (2025), 2.0 (2026), 1.9 (2027), 1.8 (2028), 1.7 (2029), 1.7 (2030), 1.6 (2031), 1.5 (2032), 1.5 (2033), 1.4 (2034).
  - Real interest rate (Percent): same series as above.
  - Relative inflation (Percent): 0.0 for all years listed.
- Real growth rate (Percent): -1.5 (2024), -2.5 (2025), -2.3 (2026), -2.3 (2027), -2.3 (2028), -2.3 (2029), -2.3 (2030), n.a. (2031), -2.2 (2032), -2.2 (2033), -2.1 (2034), -2.0 (subsequent dots).
- Other identified flows (Percent of GDP): -1.3 (2024), 0.5 (2025), 0.6 (2026), 0.6 (2027), 0.6 (2028), 0.7 (2029), 0.7 (2030), 0.0 (2031), 0.0 (2032), 0.0 (2033), 0.0 (2034).
- Contribution of residual (Percent of GDP): 3.5 (2024), 0.2 (2025), 0.0 (2026), 0.1 (2027), 0.0 (2031–2034 zeros).
- Gross financing needs (Percent of GDP): 11.4 (2024), 9.2 (2025), 9.1 (2026), 5.8 (2027), 6.4 (2028), 5.9 (2029), 5.2 (2030), 4.8 (2031), 4.6 (2032), 4.3 (2033), 4.3 (2034).
  - Of which: debt service (Percent of GDP): 6.9 (2024), 8.7 (2025), 8.8 (2026), 5.8 (2027), 6.8 (2028), 6.8 (2029), 6.8 (2030), 6.4 (2031), 6.0 (2032), 5.7 (2033), 5.3 (2034).
  - Local currency (Percent of GDP): same series as debt service.
  - Foreign currency (Percent of GDP): 0.00 for all years listed.
- Memo:
  - Real GDP growth (percent): 2.9 (2024), 4.5 (2025), 4.0 (2026–2034 each 4.0).
  - Inflation (GDP deflator; percent): 4.4 (2024), 0.5 (2025), 2.0 (2026–2034 each 2.0).
  - Nominal GDP growth (percent): 3.5 (2024), 5.0 (2025), 6.1 (2026–2034 each 6.1).
  - Effective interest rate (percent): 5.9 (2024), 6.4 (2025), 5.6 (2026), 5.4 (2027), 5.1 (2028), 5.1 (2029), 5.0 (2030), 4.9 (2031), 4.9 (2032), 4.9 (2033), 4.8 (2034).

- Key projection commentary:
  - Growth dynamics have been the primary driver of the debt trajectory since the pandemic.
  - Fiscal discipline is expected to play an increasingly important role in reducing the debt burden.
  - Under the baseline scenario, the government commits to a credible multi-year plan aiming to meet the SFRL/NFPS deficit target of 4 percent of GDP starting in 2025, gradually reducing to 1.5 percent by 2030 (a 0.5 percentage point reduction in GDP annually).
  - This plan is expected to enable a steady reduction in the debt-to-GDP ratio to 40 percent by 2040.
  - Potential risks: potentially higher financing costs and tighter global financial conditions may slow the adjustment process.

### Near-term risk analysis
- Logit stress probability (LSP):
  - 2022-23: 0.057
  - 2023-24: 0.070
  - 2024-25: 0.044
  - 2025-26: 0.103
- Change in LSP: -0.162 (2022-23), 0.013 (2023-24), -0.026 (2024-25), 0.059 (2025-26).
- Contributions to change in LSP (selected):
  - Institutional quality: 0.009, 0.000, 0.000, 0.000 (across periods).
  - Stress history: -0.001, 0.000, 0.000, 0.000.
  - Cyclical position: 0.101, -0.056, 0.006, -0.007.
  - Debt burden & buffers: -0.149, 0.024, 0.007, 0.034.
  - Global conditions: -0.117, 0.045, -0.038, 0.031.
- Predictive performance metrics (2025-2026):
  - Prob. of missed crisis, 2025-2026 (if stress not predicted): 16.4 pct.
  - Prob. of false alarm, 2025-2026 (if stress predicted): 22.5 pct.
- Commentary: Panama's risk of near-term stress is moderate. Improvements since 2020 largely reflect normalization of global conditions and fiscal consolidation efforts supported by strong economic growth.

### Realism of baseline assumptions and diagnostic indicators
- Commentary: The projected debt path is within the norm. Forecast errors do not show systematic biases.
- Indicators and diagnostics (selected):
  - Forecast Track Record: public debt to GDP, primary deficit, and r - g evaluated at t+1, t+3, t+5 horizons versus comparator group.
  - Laubach (2009) rule used as a benchmark for implied spread sensitivity: "The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio."
  - Distributional percentiles and 3-year debt reduction metrics referenced (no additional numbers beyond those shown in figures).

### Medium-term risk assessment
- Debt fanchart module:
  - Fanchart width (percent of GDP): 56.0
  - Probability of debt non-stabilization (percent): 14.5
  - Terminal debt-to-GDP x: 31.9
  - Debt fanchart index (DFI): 1.6
  - Risk signal: 3/Moderate
- Gross Financing Needs (GFN) module:
  - Average baseline GFN (percent of GDP): 6.9
  - Initial Banks' claims on the gen. govt (pct bank assets): 3.9
  - Change in banks' claims in stress (pct banks' assets): 14.2
  - GFN financeability index (GFI): 8.4
  - Risk signal: 4/Moderate
- Medium-term index and final assessment:
  - Medium-term index components: Debt fanchart index 1.6, GFN financeability index 8.4.
  - Final assessment: Medium-term mechanical signal is moderate.
  - Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, 2025-2030, if stress predicted: 39.8 pct.
- Commentary: Debt-to-GDP ratios could rise above the 2020 peak in the 75-95 percentile range. The GFN Financeability Module suggests a low level of risk under baseline but financing needs may increase significantly in a stress scenario.

### Public sector consolidation and debt definition
- Commentary on coverage and consolidation:
  - In Panama, the non-financial public sector (NFPS) is defined by Law 31 of 2011 and primarily includes the central government, the social security agency (CSS), public enterprises, and consolidated government agencies.
  - Exclusions: public enterprises such as ENA, ETESA, and AITSA; non-consolidated agencies; and the Panama Canal Authority.
- Notes and definitions:
  - CG = Central government; GG = General government; NFPS = Nonfinancial public sector; PS = Public sector.
  - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - Insurance, Pension, and Standardized Guarantee Schemes (IPSGSs) typically include government employee pension liabilities.
  - "Nominal value" definition and "Face value" definition provided for debt instruments.
  - Market value applies to traded debt securities only.

### Selected FSAP-related policy recommendations and implementation status (systemic risk, oversight, crisis management, financial integrity)
- Systemic Risk Analysis and Macroprudential Oversight (selected):
  - Develop remaining components of a solvency bank stress test model suite; use suite to inform timing and calibration of macroprudential tools.
    - Agency: SBP; Timeline: ST. Implementation status: Completed — PD updated; market stress module in place; sensitivity analyses performed.
  - Develop a liquidity stress simulation model for banks.
    - Agency: SBP; Timeline: ST. Implementation status: Completed — liquidity stress module based on FSAP template exists.
  - Establish borrower-based macroprudential tools (caps on mortgage LTVs, DTI, DSTI).
    - Agency: SBP; Timeline: ST. Implementation status: Completed — SBP compiles household loan income data semiannually since 2023; borrower-level metrics computed and shared.
  - Ensure regular and timely macroprudential policy discussions (quarterly meetings).
    - Agencies: CCF, SBP; Timeline: I. Implementation status: SBP and CCF hold regular meetings; to be held 3 times a year.
  - Develop CCF member agencies’ macroprudential capabilities; allocate MEF role in CCF.
    - Agency: CCF; Timeline: ST. Implementation status: Training conducted; MEF to participate as guest at CCF meetings.

- Banking Supervision and Resolution (selected):
  - Amend Banking Law to make explicit SBP's primary objective to promote safety and soundness.
    - Agency: MEF; Timeline: ST. Implementation status: No amendments planned short/medium term; SBP will update institutional website to disclose main objective.
  - Supervise liquidity risk on a consolidated basis and implement IRRBB regulations.
    - Agency: SBP; Timeline: ST. Implementation status: SBP evaluating approach; external consultant reviewing draft Interest Rate Risk Regulation; draft expected to be presented to Board during 2025 and included in 2025 Regulatory Sheet.
  - Introduce capital buffer framework aligned with Basel III, including capital conservation buffer (CCB) and surcharges for systemically important banks.
    - Agency: SBP; Timeline: MT. Implementation status: CCB regulation issued on October 3, 2023 (Decision No. 5-2023); CCB fully phased in by 2026. Capital surcharge planned for 2025; technical teams discussing draft.

- Payment Systems and Crisis Management (selected):
  - Adopt law on payment systems and services.
    - Agencies: MEF, SBP; Timeline: I. Implementation status: Discussions ongoing; aim to adopt payments systems law by end-2025.
  - Develop oversight policy framework for payment systems/services reflecting new mandate.
    - Agency: SBP; Timeline: ST. Implementation status: Pending adoption of payment systems law.
  - Require banks to develop recovery plans; tailored requirements for international license banks.
    - Agency: SBP; Timeline: I. Implementation status: SBP has presented actions and is considering consulting options and specialized unit creation.
  - Establish industry-funded deposit insurance scheme once resolution reforms progress.
    - Agencies: MEF, SBP; Timeline: ST. Implementation status: Medium-term project requiring bank consensus.
  - Explore a LOLR facility provided by a public authority.
    - Agencies: MEF, SBP; Timeline: ST. Implementation status: Being considered.

- Financial Integrity (selected):
  - Prohibit issuance of bearer shares and require custodial arrangements to collect/verify beneficial ownership information.
    - Agencies: MEF, SSNF; Timeline: I. Implementation status: Being evaluated; SSNF can verify UBO information; UBO registry requires UBO info regardless of bearer shares.
  - Develop procedures to dissolve/unwind suspended companies past reactivation deadline.
    - Agencies: MEF, RPP, SSNF, DGI; Timeline: ST. Implementation status: Being evaluated by working group.
  - Collect information and assess risks from foreign legal persons/arrangements incorporated/managed abroad by Panamanian law firms.
    - Agency: SSNF; Timeline: MT. Implementation status: SSNF working on three pillars — sectoral risk, reporting entity risk (self-evaluation), and UBO registry assessment.

_Source: IMF staff estimates and projections._

### 17.  Assess the money laundering

### 17. Assess the money laundering (ML)/terrorist financing (TF)/proliferation financing (PF) risks emerging from virtual asset service providers (VASPs) and identify measures to prevent or mitigate these risks; regulate and subject VASPs to supervision or monitoring for AML/CFT purposes in line with the FATF Standards.

### Emerging risks and institutional response
- A working group has previously been agreed upon to begin in April of this year to develop a regional assessment of the AML/CFT risk associated with Virtual Assets and Virtual Asset Service Providers with the support of CABEI and GAFILAT.
- The SBP has been invited to participate in this working group.
- The working group will present preliminary results and discuss findings with responsible officials to reach consistent general conclusions.
- The guidelines adopted will serve as reference inputs for the adoption of regulatory guidelines, where appropriate.

### Policy measures and implementation intent
- Assess ML/TF/PF risks emerging from VASPs.
- Identify measures to prevent or mitigate these risks.
- Regulate and subject VASPs to supervision or monitoring for AML/CFT purposes in line with the FATF Standards.
- Use working group findings and adopted guidelines as inputs for potential regulatory guidelines.

### Responsible actors and classification
- Agencies: SBP; support from CABEI and GAFILAT.
- Classification: ST (short term) indicated for the recommendation.

---

### Related financial-sector thematic actions in the source text

H3: Climate and greening the financial sector
- Recommendation 18: Improve coordination among superintendencies, government entities, and private sector stakeholders on climate-related and environmental risks; engage with external partners and join international platforms.
  - Agencies: MiAMBIENTE, MEF, SBP, SMV, SSRP
  - Classification: I
  - Implementation note: They participate in meetings where all the actors are present under the advice of the UN Environmental Program (UNEP). Banking and securities companies have been chosen to participate in a pilot project for the implementation of the taxonomy.
- Recommendation 19: Finalize the green taxonomy, making sure it is environmentally sound, well communicated, and covers the entire financial sector.
  - Agencies: MiAMBIENTE, MEF, SMV, SBP, SSRP
  - Classification: I
  - Implementation notes:
    - On March 27, 2024, Panama launched its sustainable finance taxonomy.
    - The Central American Council of Superintendents of Banks, Insurance and other Financial Institutions (CCSBSO) launched the regional green taxonomy on December 4, 2024.

H3: Digital financial services and financial inclusion
- Recommendation 20: Issue secondary regulations ensuring principles of regulatory neutrality and proportionality, and protection of customer funds, covering issuance of e-money, and rules for licensing of nonbank payment service providers.
  - Agency: SBP
  - Classification: ST
  - Implementation note: Implementation of this recommendation requires explicit legal powers for the SBP through legislation as proposed in Recommendation 9.
- Recommendation 21: Establish a comprehensive standalone financial consumer protection regulatory framework with a specific focus on the new risks to consumers due to digital financial services and fintech.
  - Agency: SBP
  - Classification: MT
  - Implementation notes:
    - For banking entities, the regulation explicitly indicates the parameters that banks must follow to mitigate the risks of the various electronic channels (Decision No. 6-2011).
    - Other users of (nonbank) financial services do not currently fall under the jurisdiction of the SBP; it is important to approve the legal framework regulating the payment system so that these payment providers must comply with clear rules set out in a legal framework.

---

### Annex IX (summary points on tax revenue reform measures included in the same source)
- As of 2023, tax revenue stood at 7.7 percent of GDP.
- The Selected Issues Paper (SIP) estimates that implementing comprehensive tax reforms could yield a revenue increase of about 2.5 percent of GDP.
- Specific contributions identified:
  - Elimination of all tax exemptions could allow for an increase in VAT and CIT revenue of approximately 2 percent of GDP.
  - Raising the VAT rate from 7 percent to 10 percent is projected to generate about 1.5 percent of GDP.
  - Removal of the lump sum compensation in the personal income tax system is expected to contribute 0.03 percent of GDP.
- Additional gains are possible from broader base-broadening measures, improved compliance, and better design and collection of excise taxes.

*Source: Extracted content from the provided IMF PDF chapter.*

### 0.07 percent of GDP.

### PANAMA — STAFF REPORT FOR THE 2025 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

### FUND RELATIONS, FINANCING, AND DATA ADEQUACY
- "0.07 percent of GDP."
- Prepared by Olusegun Akanbi.
- Membership Status: Joined March 14, 1946; Article VIII.
- General Resources Account:
  - Quota 376.80 SDR Million 100.00 Percent of Quota
  - Fund holdings of currency 322.40 SDR Million 85.56 Percent of Quota
  - Reserve Tranche Position 54.41 SDR Million 14.44 Percent of Quota
- SDR Department:
  - Net cumulative allocation 558.16 SDR Million 100.00 Percent of Allocation
  - Holdings 383.28 SDR Million 68.67 Percent of Allocation
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements:
  - PLL: Approval Jan 19, 2021; Expiration January 18, 2023; Amount Approved 1,884.00 SDR Million; Amount Drawn 0 SDR Million.
  - Stand-By: Approval June 30, 2000; Expiration March 29, 2002; Amount Approved 64.00 SDR Million; Amount Drawn 0 SDR Million.
  - EFF: Approval December 10, 1997; Expiration June 29, 2000; Amount Approved 120.00 SDR Million; Amount Drawn 40 SDR Million.
- Outright Loans:
  - RFI: Date of Commitment April 15, 2020; Date Drawn May 15, 2020; Amount Approved 376.80 SDR Million; Amount Drawn 376.80 SDR Million.
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - 2025 Principal:  (not listed); Charges/Interest 2.70; Total 2.70
  - 2026 Charges/Interest 5.23; Total 5.23
  - 2027 Charges/Interest 5.23; Total 5.23
  - 2028 Charges/Interest 5.23; Total 5.23
  - 2029 Charges/Interest 5.22; Total 5.22
- Safeguards Assessment:
  - First-time assessment of the National Bank of Panama (NBP) completed September 2020 in connection with the RFI purchase on April 15, 2020.
  - Assessment found strong institutional arrangements; BNP implemented all recommendations including legal framework for operationalizing the FES, strengthened auditor selection criteria, and enhanced investment practices.
- Exchange Rate Arrangement:
  - Panama uses the U.S. dollar as the primary means of payment; the balboa issued only as coins and fixed at 1 balboa per U.S. dollar.
  - Panama has accepted the obligations of Article VIII, Sections 2(a), 3, and 4.
- Last Article IV Consultation: Concluded June 3, 2024. Panama is on the standard 12-month consultation cycle.
- FSAP: 2023 FSAP concluded December 1, 2023; main risks from potential external shocks; banking sector well capitalized, liquid, generally resilient; some pockets of weakness revealed.
- Technical Assistance: Fiscal TA on budget execution and control, tax diagnostics, revenue administration reform; STA TA on national accounts and monetary/financial statistics; MCM TA on banking stress test, Basel III, macroprudential framework.
- Resident Representative: Gerardo Peraza (based in Guatemala) is the Regional Resident Representative for Central America, Panama and the Dominican Republic.

### RECENT MACROECONOMIC DEVELOPMENTS AND OUTLOOK
- 2024 performance:
  - Economic growth decelerated but exceeded expectations in 2024.
  - Year-on-year growth in 2024 exceeded initial expectations by nearly half a percentage point.
  - Closure of mining operations, increased unemployment, and recurrent droughts affected transit through the Panama Canal.
- 2025 outlook and staff forecast revision:
  - Staff revised the growth forecast to 4.5 percent from 3 percent for 2025.
  - First quarter 2025 growth: 5.2 percent year-on-year increase.
  - Growth drivers cited: private construction, transportation, commerce, communications, financial intermediation, manufacturing, and tourism.
  - Inflation remains low despite supply chain disruptions and commodity price volatility.
- High-frequency indicators and consumption:
  - Increased consumption in both public and private sectors.

### FISCAL POLICY, FISCAL REFORM, AND DEBT DYNAMICS
- Fiscal consolidation and measures:
  - President Mulino approved an expense reduction plan equivalent to 2.1 percent of GDP in June.
  - Measures aim to limit borrowing and interest burdens and eliminate arrears while protecting vulnerable populations.
  - Authorities working to reduce spending by optimizing payroll structures and streamlining government processes; recalibrating budget allocations, adjusting budget execution ceilings, and appropriating funds based on new revenue projections.
- Fiscal reform package and targets:
  - Authorities committed to reducing the non-financial public sector (NFPS) fiscal deficit to 4.0 percent of GDP by 2025, in line with a revised Social and Fiscal Responsibility Law (SFRL).
  - Plan applies to both operating expenditures (US$ 426.5 million) and investment expenditures (US$ 1,470 million).
  - Tax collection has increased, surpassing recent projections.
- Debt sustainability:
  - Public debt remains sustainable with debt-to-GDP ratio projected to resume a downward trajectory in 2026, underpinned by an improving primary balance.
  - Authorities implementing a multi-year growth-friendly adjustment plan with spending controls and prudent local debt issuance.
  - Downward trend in borrowing costs and lengthy maturity levels cited as supportive.
  - Panama has robust access to international capital markets; dollarized economy and stable political environment noted.
  - Moody’s recently reaffirmed Panama’s investment grade sovereign risk rating (statement in text).

### EXTERNAL SECTOR AND TRADE
- Current account and exports:
  - Panama's current account has strengthened.
  - Service exports rose by 10.2 percent year-on-year during the first quarter of 2025.
  - Exports reached nearly US$5 billion, the highest levels recorded in over a decade.
  - Overall export sector decline due to nationwide halt in mining activities offset partially by a significant increase in agricultural exports.
- Tourism:
  - Visitor arrivals increased by 6.2 percent; tourism receipts increased by 6.7 percent.
- Foreign Direct Investment:
  - In 2024, FDI surged by 28.9 percent year-on-year, driven by reinvested utilities and new capital inflows.

### FINANCIAL SYSTEM, INTEGRITY, AND TRANSPARENCY
- Banking sector soundness:
  - Banking sector well capitalized and system liquidity significantly exceeding minimum regulatory requirements.
  - Capital buffers are twice the minimum regulatory target.
  - Credit portfolio totals US$ 65 billion.
  - Debt-service-to-income ratio averages 44 percent; ratios approaching the legal limit of 50 percent subject to more stringent monitoring.
  - Stress tests indicate adequate capitalization even for smaller banks under extreme scenarios.
  - Financial Stability Council has resumed regular meetings.
- AML/CFT and international cooperation:
  - Significant progress aligning practices with international AML/CFT standards across all sectors.
  - Consultations with counterparts in Spain, France, Italy, Greece, and Germany.
  - Panama secured accession to MERCOSUR as an associate member (first country outside South America to do so).
  - European Commission recently delisted Panama as a high-risk jurisdiction; decision ratified by the European Parliament.
  - Panama preparing for subsequent round of GAFILAT evaluations.
  - Beneficial owner registry now encompasses over 90 percent of the country's legal entities.
  - Executive Decree 512 (2024) prohibits countries sanctioned by the European Union from using Panama's ship registry.
  - Recognition for Panama's role in the Global Gateway program.

### STRUCTURAL REFORMS, CLIMATE, AND INSTITUTIONAL PRIORITIES
- Panama Canal operations and climate resilience:
  - PCA reported a 2,500-transit reduction due to El Niño-induced drought; 2,188 neo-Panamax ships passed through the new Canal operation — a 21 percent increase from last year.
  - Panama Canal expected to contribute nearly US$ 2.8 billion (equivalent to 3.1 percent of GDP) in dividends for the 2025 fiscal year; this will accrue to the US$ 28 billion delivered since 2000.
  - US$ 1.6 billion Rio Indio project aims to increase daily transit capacity by 10–15 vessels and address water security concerns.
  - Incorporation of electric and hybrid tugboats; first Isla Barro Colorado built in Spain and delivered in the first quarter of this year.
- Environmental and climate governance:
  - Creation of the Panamanian Carbon Exchange as part of Panama's Sustainable Financing Framework, developed jointly with the Inter-American Development Bank (IDB).
  - Deployment of an additional 50 percent of park rangers over nine months and enhanced surveillance of 35 percent of territory designated as protected areas.
  - Incoming administration pledged full compliance with the Escazú Agreement and comprehensive environmental audits for future mining policy decisions.
- OECD accession exploration:
  - Authorities exploring OECD membership and seeking technical dialogue; IDB provided support at the Fourth International Conference on Financing for Development.

### CONCLUDING REMARKS AND AUTHORITIES' ASSESSMENT
- Authorities broadly agree with staff's assessment of Panama's economic performance and outlook under challenging international financial and trade conditions.
- Authorities emphasize commitment to:
  - Maintaining sound macroeconomic policies that promote sustainable growth, financial stability, and social development.
  - Fiscal discipline, financial sector soundness, transparency, and ambitious structural reforms.
  - Preserving investor confidence and safeguarding macroeconomic resilience.
- Authorities view Panama as strategically positioned to advance toward inclusive growth and macroeconomic sustainability for the benefit of all citizens.

*Prepared by Western Hemisphere Department; Statement by André Roncaglia, Executive Director for Panama, Eloy Fisher Hogan and Frank Fuentes, Advisors to Executive Director; July 28, 2025.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1panea2025001-source-pdf.pdf_