## _cr0607

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### Executive summary and macroeconomic overview
- Panama is an open, fully dollarized economy; service sector accounts for about three-quarters of total value-added; services are two thirds of exports which amount to 30 percent of GDP.
- Growth and labour:
  - "An economic recovery has been underway since late 2003, with real GDP growing at 6 percent in 2004, but it is expected to slow down to 3½ percent in 2005."
  - Real GDP growth ranged between 0.6 percent (2001) and 7.3 percent (1998) over the last decade.
  - Unemployment remained above 11.5 percent throughout the decade; rebound in 2003–04 likely left unemployment above 11 percent in 2004; household-survey unemployment 2004: 11.8 percent (August).
- Poverty and social indicators:
  - Poverty rate: 37 percent on average; rural poverty: 67 percent.
  - 54 percent of the population live in rural areas; poverty concentration among indigenous people: 98 percent.
  - Malnutrition among children: 6 percent (urban), 15 percent (nonindigenous rural), 49 percent (indigenous rural).
- Financial deepening: private credit to GDP rose by 18 percentage points over the decade to 2004, to 89 percent.
- Inflation: low; CPI (period average) 2004 staff estimate: 0.5/2.0 (source contains both 1.5 percent and staff estimate 2 percent for 2004 in different places).

### Fiscal performance, targets, and reforms
- 2004 fiscal outcome and targets:
  - Fiscal deficit (excluding the Panama Canal Authority (PCA)): 5 percent of GDP in 2004.
  - 2005 budget target: fiscal deficit (excluding PCA) of 3.6 percent of GDP.
  - Fiscal reform adopted February 2005 aims to lower the deficit (excluding PCA) to about 1 percent of GDP by 2007 (fiscal reform objective: fiscal deficit of 1 percent of GDP in 2007 or an adjustment of about 4 percentage points of GDP in three years).
- Nonfinancial public sector balances (percent of GDP):
  - Primary balance (excluding PCA): 1.0 (2002); -0.3 (2003); -0.5 (2004); projected 1.1 (2005).
  - Overall balance (excluding PCA): -3.3 (2002); -4.7 (2003); -5.0 (2004); -3.6 (2005).
- Public debt:
  - Debt (end of period) series shows end-2004 debt of 68.1 percent of GDP.
  - Nonfinancial public sector debt (percent of GDP): 64.7 (2001); 63.7 (2002); 63.3 (2003); 68.1 (2004); 63.7 (2005).
  - Public debt (US$): increased to US$9.98 billion at end-December 2004.
- Fiscal rules and FRL:
  - Authorities suspended the fiscal responsibility law (FRL) until end-2005.
  - FRL original net debt target: decline to 50 percent by 2017 (from approximately 58 percent in 2002).
  - FRL fiscal deficit ceiling: 2 percent of GDP in any given year (as framed under FRL).
  - Planned revision of the FRL in 2005; staff recommends a combination of numerical and procedural rules that are well-defined, consistent, and enforceable.
- Revenue and tax reform:
  - Key elements: close corporate loopholes; alternative minimum income tax for individuals and corporations; tax on casino payouts; include representation expenses in taxable income; increase penalties for fraud; simplify system by eliminating low-yielding taxes; repeal some fiscal incentives.
  - Full-year revenue effect of reform estimated at 1 percent of GDP.
  - Authorities adopted immediate expenditure restraint of US$225.8 million.
- Arrears and transparency:
  - Government payables over 90 days: 1.8 percent of GDP as of late November 2004.
  - 2005 budget assumes reduction in payables of about 0.8 percentage point of GDP.
  - Recommended: explicit definition of arrears with interest accruing; request for a fiscal ROSC.

### Social security and pension reform
- Objectives: restore financial viability; reduce administrative costs; improve pension reserve fund management; align contributions and benefits.
- Risk: without reform the pension reserve fund may be depleted by 2010–12.
- Options: parametric reforms phased in (retirement age, accrual rates) or comprehensive reform phased over years to eliminate operating deficits.
- Social security concerns extend to maternal and health care program financing.

### Panama Canal Authority (PCA) and expansion considerations
- Treatment and fiscal presentation:
  - PCA excluded from public sector accounts for policy purposes; authorities present both balances (excluding and including PCA).
  - PCA appears not to meet all criteria for being commercially run (exemption from corporate income tax; lack of private equity).
- PCA operations and transfers:
  - PCA transfers to government: tolls and fees equivalent to 1.1 percent of GDP in 2003; dividend distributions equivalent to 0.8 percent of GDP in 2003.
  - Canal Authority payroll and employment regime: merit system; Labor Code provisions do not apply to the PCA.
- Tolls schedule and profitability:
  - Tolls pricing: two-phase increase implemented Oct 2002 (average 8 percent) and July 2003 (additional 4.5 percent).
  - Container-ship toll reform effective May 1, 2005: three-stage toll increases by 35 percent (May 2005), 17 percent (January 2006), and 10 percent (January 2007).
  - PCA profitability and indicators from Box 3: Profitability: 10.8; Debt level: 6.3; Debt cost: 0 (as presented).
- Canal expansion study and project parameters:
  - Feasibility studies covering engineering, environmental, financial, geological, hydrological aspects, and market research may be completed in the first half of 2005.
  - Project might begin in 2007 and might be completed around 2014.
  - Potential investment magnitude: some 30–35 percent of GDP.
  - Proposed financing strategy: PCA to obtain investment-grade credit rating and secure financing without government guarantees, possibly through a revenue bond.
  - Proposed toll increases starting May 2005 in three stages to boost retained earnings.

### Medium-term outlook, scenarios, and debt sustainability
- Staff projection for 2005: real GDP growth slowdown from 6 percent (2004) to 3½ percent (2005); inflation expected to remain low.
- Active scenario (assumptions and outcomes):
  - Assumes full implementation of February 2005 fiscal reforms, social security reform, conclusion of a U.S. FTA, and additional measures to reach medium-term deficit target of 1 percent of GDP by 2007.
  - Primary balance stabilizes at 3½ percent of GDP.
  - Public debt would decline to 53 percent of GDP by 2009, and to 38 percent by 2014 if the primary surplus of 3½ percent of GDP is maintained.
  - Medium-Term Macroeconomic Framework — Active Scenario (select figures):
    - Real GDP at market prices: 4.3 (2003), 6.0 (2004), 3.5 (2005), 4.0 (2006–2009).
    - National savings: 18.0 (2003), 20.0 (2004), 19.1 (2005), rising to 24.8 (2009).
    - Total public debt: 63.3 (2002), 68.1 (2004), 63.7 (2005), 61.1 (2006), 52.9 (2009).
    - Current account balance: -3.4 (2003), -2.0 (2004), -1.5 (2005), improving to 0.8 (2009).
- Low-case scenario (assumptions and outcomes):
  - Assumes fiscal reforms are not sustained; no pension reform; no additional structural reforms.
  - Public debt would rise to 70 percent of GDP by 2009, from a projected 64 percent in 2005.
  - Growth would slow to 2½ percent; inflation projected to remain low under dollarization.
  - Medium-Term Macroeconomic Framework — Low-Case Scenario (select figures):
    - Real GDP at market prices: 4.3 (2003), 6.0 (2004), 3.5 (2005), 3.0 (2006–2007), 2.5 (2008–2009).
    - Total public debt: 63.7 (2005), 63.7 (2006), 64.9 (2007), 67.2 (2008), 70.1 (2009).
    - Current account balance: -3.4 (2003), -2.0 (2004), -1.5 (2005), -0.8 (2006), -1.6 (2009).
- Key numeric scenario anchors and stress-test findings:
  - Feasibility studies completion: first half of 2005.
  - Project possible start: 2007; completion: around 2014.
  - Potential investment size: some 30–35 percent of GDP.
  - Proposed toll increases starting: May 2005 (in three stages).
  - Targeted fiscal deficit for 2005 (excluding PCA surplus): 3.6 percent of GDP.
  - Debt-stabilizing primary balance example (Active scenario): 0.6 (table entry).
  - Stress tests show debt paths sensitive to fiscal slippage, interest-rate and growth shocks; principal vulnerability is sustained fiscal slippage.

### Financial sector performance and policies
- Banking system recovery and indicators:
  - Domestic deposits rose by 8–9 percent in 2004; nonresident deposits stabilized and resumed growth in 2004.
  - Domestic credit to private sector grew 9–11 percent in 2004 (figures reported: 9 percent and 11 percent in different tables).
  - Banking system assets: US$33.2 billion (2004), a 4.5 percent increase vs. 2003.
  - Nonperforming loans: trended down to about 2 percent on average at end-September 2004; other figures show 1.8 percent (end-2004) and 2.0–2.1 percent in tables.
  - Capital adequacy ratios: 19 percent on average (end-September 2004 tables report 17.5–19.8 across quarters; regulatory CAR requirement: 8 percent); CAR reported as 18.6 percent in one place.
  - Liquidity: liquid assets-to-deposits ratio 27 percent (end-September 2004) or 42 percent if marketable securities included; table entries show 28.0 and other quarterly levels.
  - Return on capital: 16.2 percent; return on assets: 2.3 percent (2003/2004 figures).
- Supervision and contingency framework:
  - No lender of last resort for dollarized system; no contingent line of credit abroad for BNP.
  - Strengthened regional supervisory coordination in 2003–04; Superintendency preparing for Basel II adoption.
  - Strategic plans being prepared for the National Bank of Panama (BNP) and the Savings Bank to improve governance and reduce outstanding credit to government.
  - Staff suggested evaluation of state banks should extend to the National Mortgage Bank and the Agricultural Development Bank.
- Debt management and domestic market development:
  - Following retirement of US$400 million in Brady bonds in Q1 2004, US$370 million remains; buybacks not planned.
  - US$350 million line of credit from BNP to the government will be repaid over 11 years; mission recommended more rapid repayment.
  - Staff recommends gradual increase in domestic financing through competitive auctions.

### External sector, trade policy, and integration
- Current account and trade:
  - External current account: -3.4 percent of GDP in 2003; improved to an estimated -2.0 percent in 2004; projected -1.5 percent of GDP in 2005 (Active scenario).
  - Balance of payments table (Active scenario): current account (millions of U.S. dollars): -442 (2003); -273 (2004); -211 (2005); -82 (2006).
  - Trade policy focus: conclude FTAs; free trade agreement with Taiwan Province of China (2003); negotiations with the United States begun April 2004.
- FTA with United States:
  - Expected to broaden attraction of U.S. investments, boost market access for export-oriented services, and enhance legal frameworks for investors.
- Competitiveness:
  - Real effective exchange rate lower in 2004 than in preceding several years.
  - Panama ranked 58th out of 104 countries in the World Economic Forum competitiveness report.
  - Exports of goods and services grew at annual average 3½ percent over five years to 2004; GDP grew at 3¼ percent annually over same period.
- Trade-related infrastructure and zones:
  - Development of special economic zone (Howard) with simplified procedures and flexible labor rules; labor flexibility introduced mid-2004 for special economic zones.

### Investment projects, infrastructure, and mega-projects
- Major investment figures and projects (select exact numbers):
  - Second Panama Canal bridge: US$200 million (public).
  - ACP investment and maintenance program (2004): nearly US$170 million.
  - Private investments surged at over US$300 million (2004).
  - PPC port expansion (2004): over US$200 million.
  - PPC-Hutchison Wampoa and MIT planned investment in 2005: US$500 million (MIT invested to date: US$300 million; PPC invested to date in Balboa Port: US$340 million).
  - Shopping mall and hotel in Panama City: US$100 million.
  - Bayano hydroelectric investment: US$40 million (capacity increase 20 percent).
  - La Fortuna expansion: US$ $225 million to reach 150 megawatts.
  - Total electricity production at end-2004: slightly over 5,000 megawatts; 58 percent hydroelectric.
  - Panama Canal new locks: approximate investment of over US$4.5 billion; canal crossings 2004: 14,035 (6.7 percent increase vs. 2003); capacity may be reached by 2012.
  - Gas pipeline estimated cost: US$200 million; possible operation in 24 months.
  - Colombian electricity interconnection: 300 megawatts; alternate routes 571 km (US$169 million) and 514 km (US$139 million).
  - Pacific coast port under consideration: US$600 million.

### Governance, structural reforms, and anti-corruption
- Authorities’ strategic objectives: restore fiscal discipline, achieve debt sustainability, provide basis for sustained growth, job creation, poverty reduction, and human capital development; emphasize good governance, transparency, accountability.
- Anti-corruption and governance actions:
  - Repealed decree impeding Law on Transparency; established national council for transparency and anti-corruption; audits of contractors and public institutions underway.
  - Zero-tolerance policy on corruption declared; Anti-Corruption Council established; UN Convention Against Corruption submitted to Legislature.
- Structural reform priorities: judicial reform, deregulation, governmental restructuring, attracting foreign investment, trade liberalization, and education reform to meet workforce needs.
- Labor market flexibility: greater flexibility introduced for special economic zones in mid-2004; staff recommends selective generalization.

### Data quality, ROSCs, and technical assistance
- Data strengths and gaps:
  - Economic statistics generally adequate for monitoring, but timeliness and certain coverage areas need improvement.
  - National accounts revision completed in 2004 (base year changed from 1982 to 1996; revised data for 1996−2003).
  - New CPI introduced second half of 2004 based on 1997/98 household survey; latest CPI data in the report: June 2004.
  - Fiscal data compiled on a cash basis; need accrual-basis data, more timely reporting, and improved intrapublic-sector transfer consistency.
  - Balance of payments data subject to sizeable quarterly revisions; most recent BOP statistics in report pertain to September 2004.
- Planned and recommended work:
  - Authorities interested in a data module ROSC; staff plans follow-up to the OFC Module 2 assessment and fiscal/data ROSCs; STA technical assistance on GFSM 2001 migration ongoing.
  - Next Article IV consultation proposed on a 12-month cycle.

### Key numeric tables and indicators (selected exact figures preserved)
- Nominal GDP (millions of balboas): 2001: 11,808; 2002: 12,272; 2003: 12,862; 2004: 13,793; 2005: 14,531.
- Nonfinancial public sector revenue (percent of GDP): 2001: 23.8; 2002: 22.9; 2003: 22.4; 2004: 21.3; 2005 Est./Proj.: 22.5.
- Balance excluding Canal Authority (percent of GDP): 2001: -2.3; 2002: -3.3; 2003: -4.7; 2004: -5.0; 2005: -3.6.
- Nonfinancial public sector debt (percent of GDP): 2001: 64.7; 2002: 63.7; 2003: 63.3; 2004: 68.1; 2005: 63.7.
- Net international reserves (millions of U.S. dollars, end period): 2000: 707; 2001: 1,116; 2002: 1,171; 2003: 1,013; 2004: 633.
- Private sector credit (millions): 2000: 10,851; 2001: 11,735; 2002: 10,891; 2003: 11,105; 2004: 12,296; 2005: 13,284.
- Total deposits (millions): 2000: 8,952; 2001: 9,805; 2002: 9,875; 2003: 10,305; 2004: 11,121; 2005: 11,904.
- Current account (millions of U.S. dollars): 2000: -689; 2001: -174; 2002: -61; 2003: -442; 2004: -273; 2005 proj.: -211.
- External debt (millions of U.S. dollars): 2000: 5,604; 2001: 6,263; 2002: 6,349; 2003: 6,503; 2004: 7,259; 2005 proj.: 7,196.
- Total public sector debt (millions): 2000: 7,732; 2001: 8,401; 2002: 8,521; 2003: 8,661; 2004: 9,869; 2005 proj.: 9,675.
- M2 (12-month percent change): 2000: 8.9; 2001: 9.5; 2002: 0.9; 2003: 4.6; 2004: 8.2; 2005 proj.: 7.0.
- Banking indicators (selected): nonperforming loans banking system: 2003: 3.3; 2004 Mar: 3.2; Jun: 2.9; Sep: 2.7; Dec: 2.8; 2004 overall: 2.1; final column: 2.0. Capital-to-risk-weighted-assets domestic banks: 2003: 14.8; 2004 Mar: 17.1; Jun: 17.6; Sep: 17.5; Dec: 17.8; other entries report 19.8 and 19.6.
- Social indicators (selected): HDI rank 2004: 61/177; GDP per capita PPP (2002) Panama: 6,170; Latin America and Caribbean average: 4,842; life expectancy (2002): Panama: 74.6; under-5 mortality (2002): Panama: 23 per 1,000.

### Staff appraisal and policy recommendations (highlights)
- Fiscal priorities:
  - Strengthen government finances in 2005 and beyond; strict implementation and close monitoring of fiscal measures essential.
  - Reduce fiscal deficit toward 3.6 percent of GDP in 2005 (excluding PCA) and about 1 percent by 2007.
  - Control current expenditures, reduce overstaffing, and protect key social outlays.
  - Develop a medium-term expenditure framework for multi-year infrastructure planning.
- Revenue and tax measures:
  - Implement tax reform to improve equity and buoyancy (alternative minimum tax, broaden base, close loopholes, eliminate poorly targeted incentives).
  - Use stronger-than-budgeted revenues to reduce unpaid bills to domestic suppliers.
- Pension and social security:
  - Undertake comprehensive or parametric pension reform to restore viability; improve portfolio management and reduce overstaffing at social security.
- Financial sector and governance:
  - Continue strengthening supervision (including regional coordination), governance of state banks, and development of domestic debt markets.
- Canal expansion and contingent risks:
  - If approved, Canal expansion could boost service exports; minimize fiscal risks and ensure PCA is managed commercially and secures financing without sovereign guarantees.
- Data and transparency:
  - Improve timeliness and coverage of statistical series; proceed with fiscal and data ROSCs and STA technical assistance.

*IMF staff report content as presented in the supplied PDF excerpt.*

### Executive Summary ......................................................................................................

### EXECUTIVE SUMMARY

### Background and overview
- Panama is an open, fully dollarized economy whose mainstay is a large and diversified service sector that accounts for about three-quarters of total value-added. Two thirds of exports, which amount to 30 percent of GDP, are services.
- Growth: "An economic recovery has been underway since late 2003, with real GDP growing at 6 percent in 2004, but it is expected to slow down to 3½ percent in 2005." Inflation remains low.
- Over the last decade, growth ranged between 0.6 percent (2001) and 7.3 percent (1998). In the last five years, sources of growth shifted from domestic demand to the external sector.
- Unemployment remained above 11.5 percent throughout the decade; the rebound in 2003–04 likely left unemployment above 11 percent in 2004.
- Financial deepening: increase in the ratio of private credit to GDP of 18 percentage points over the decade to 2004, to 89 percent.
- Social indicators: poverty rate is 37 percent on average (67 percent in rural areas; 54 percent of the population live in rural areas and 98 percent poverty concentration among indigenous people). Malnutrition among children: 6 percent in urban areas, 15 percent in nonindigenous rural areas, and 49 percent in indigenous rural areas.

### Fiscal performance and outlook
- Fiscal deficit: "The fiscal deficit (excluding the Panama Canal Authority (PCA)) reached 5 percent of GDP in 2004."
- Fiscal program and targets:
  - A fiscal reform adopted in February 2005 is part of a plan to lower the deficit (excluding the PCA) to about 1 percent of GDP by 2007.
  - The 2005 budget targets a reduction in the fiscal deficit to 3.6 percent of GDP.
  - The fiscal reform provides for the phased introduction of tax reform, containment of current expenditure, and repeal of tax incentives.
- Nonfinancial public sector: primary balance (excluding PCA) evolved from 1.0 (2002) to -0.3 (2003) to -0.5 (2004) and projected 1.1 (2005); overall balance (excluding PCA) -3.3 (2002), -4.7 (2003), -5.0 (2004), -3.6 (2005).
- Debt: "Debt (end of period) 3/63.7 63.3 68.1 63.7" (series indicates end-2004 debt of 68.1 percent of GDP).
- The authorities suspended the fiscal responsibility law (FRL) until end-2005 because they did not regard compliance with the deficit limit of 2 percent of GDP to be feasible.
- Domestic financing effects:
  - Domestic financing of the public sector deficit in 2004 led to a decline in net international reserves of US$380 million.
  - Credit to the central government from the state-owned National Bank of Panama (BNP) amounted to about 2.5 percent of GDP in 2004.
  - The social security fund (CSS) withdrew some of its deposits at the BNP to cover an operating deficit, contracting BNP’s foreign assets and reducing its liquidity.

### Financial sector and market response
- Recovery: The banking system experienced a substantial recovery in 2003–04. Domestic deposits rose by 8 percent in 2004; nonresident deposits stabilized in 2003 and resumed growth in 2004.
- Credit growth: Rapid growth of credit to commerce and mortgages led to an 11 percent increase in domestic credit to the private sector in 2004.
- Soundness indicators:
  - Nonperforming loan ratios trended downward to 2 percent on average at end-September 2004.
  - Capital adequacy ratios were 19 percent on average.
  - Liquidity in private banks remained ample.
  - Domestic deposit rates declined, converging to LIBOR; lending rates declined more slowly, widening interest rate margins in local banks.
- Market perception and ratings:
  - Bond markets began to respond favorably to the new administration’s emphasis on fiscal discipline and transparency.
  - Moody’s and Standard & Poor’s sovereign ratings for Panama are one and two steps below investment grade, respectively.
  - "In mid-February S&P improved Panama’s outlook from negative to stable."

### External sector and trade policy
- External current account: improved from -3.4 percent of GDP in 2003 to an estimated -2.0 percent in 2004; projected -1.5 percent of GDP in 2005.
- Trade policy: focus on concluding free trade agreements. Recent developments include a free trade agreement with Taiwan Province of China (2003) and initiation of negotiations with the United States in April 2004; regional agreements include one with El Salvador and negotiations with Costa Rica and Nicaragua.
- Panama Canal expansion: "An expansion of the Panama Canal at an estimated cost of over 30 percent of GDP could, if approved in a national referendum, have a far-reaching impact on the economy’s growth prospects."

### Medium-term outlook and risks
- Medium-term outlook: "Encouraging, assuming implementation of the authorities’ fiscal program, which should put the public debt ratio on a steadily declining path."
- Key downside risk: failure of the administration to sustain the fiscal adjustment effort now underway.
- Staff projection for 2005: slowdown in real GDP growth from 6 percent in 2004 to 3½ percent in 2005; construction activity expected to decelerate but remain at a high level due to extension of tax incentives; external contribution to growth likely to diminish; inflation expected to remain low.

### Policy priorities and structural issues
- Authorities’ strategic objectives: restore fiscal discipline to achieve debt sustainability and provide a basis for sustained growth and job creation, poverty reduction, and human capital development. Good governance, transparency, and accountability are given priority.
- Pension reform: authorities preparing a reform of the public pension system, which may entail some combination of changes in benefits, eligibility requirements, and financing.
- Growth strategy: enhance competitiveness of export-oriented service sector; emphasize human capital development and adequate infrastructure.
- Other fiscal transparency measures: beginning September 2004, the new administration introduced revenue and expenditure measures yielding an estimated 0.2 percentage point of annual GDP and reviewed fiscal accounting methods; noted that cash-based deficit did not reflect an apparent increase in payables in 2003–04 and certain nontax revenue was over-reported.

*Source: Executive Summary (IMF staff report).*

### 16.      The authorities’ fiscal policy objectives are to lower the public debt burden; restore

### _cr0607 - 16.      The authorities’ fiscal policy objectives are to lower the public debt burden; restore

### Fiscal objectives and targets
- Objectives:
  - Lower the public debt burden.
  - Restore viability to the public pension system.
  - Enhance transparency and accountability in the public sector.
  - Over the medium term, address unmet needs for public investment.
- Short- and medium-term deficit targets:
  - 2005: a 1½ percentage-point of GDP reduction in the nonfinancial public sector deficit (excluding the PCA), to 3.6 percent of GDP.
  - By 2007: the deficit projected to decrease further, to about 1 percent of GDP.
- Staff view: the deficit targets for 2005 and the medium term are appropriate for Panama’s dollarized economy and should support good public debt dynamics.

### Fiscal strategy and implemented reforms
- Elements of the authorities’ comprehensive fiscal strategy:
  - Annual budget restricts public investment largely to completion of ongoing projects and limits low-priority current spending.
  - Multi-faceted fiscal reform adopted in early February 2005: containment of current expenditure, tax reform, repeal of fiscal incentives for certain sectors, and measures aimed at greater accountability in the public sector.
  - Proposal for social security reform to be readied for public discussion and presentation to the National Assembly.
  - Revision of the fiscal responsibility law (FRL) planned in the course of 2005.
- Staff assessment:
  - Measures already adopted should be adequate to achieve, and likely exceed, the fiscal target for 2005.
  - Phased impact of adopted measures together with plans for social security reform should contribute to further fiscal consolidation in following years.
  - Once the fiscal impact of these reforms is known, authorities will assess whether additional measures are needed to meet medium-term fiscal targets.

### Measures to control current expenditure
- Specific controls:
  - Public sector employment to be reduced to end-1999 levels by the beginning of 2008, in part through attrition.
  - Growth of primary current expenditure limited, starting in 2006, to the growth of current revenue in the preceding year.
  - Administrative expenses curtailed; outlays for professional services curtailed.
- Employment target detail:
  - Employment would decline from about 180,000 to a range of 165–170 thousand by end-2007 (taking account of exceptions for health, education, and security services).
  - Government agencies must submit plans by mid-2005 for achieving the targeted reduction.
- Objective: rationalization to support deficit reduction and shift composition of outlays toward roads infrastructure and expanded facilities in health and education.

### Tax reform and revenue effects
- Key elements of the tax reform:
  - Close loopholes in corporate income taxation.
  - Introduce an alternative minimum income tax for individuals and corporations.
  - Introduce a tax on casino payouts.
  - Include representation expenses in taxable income.
  - Increase penalties for fraud.
  - Simplify the tax system by eliminating a number of low-yielding taxes.
  - Eliminate fiscal incentives in some cases where tax breaks were poorly targeted (notably in the industrial sector); future fiscal incentives to be explicitly limited in duration.
- Revenue impact:
  - Part of the reform will take immediate effect; the full-year revenue effect is estimated at 1 percent of GDP.
- Staff view: removing ineffective incentives and closing loopholes can improve equity and help gain public acceptance.

### Arrears reduction and transparency improvements
- Arrears plan for 2005:
  - Eliminate payables to suppliers that are more than 90 days old as a first step.
  - Then lower the maximum duration of payables to 60 days.
- Key figures:
  - Government payables over 90 days amounted to 1.8 percent of GDP as of late November 2004.
  - The 2005 budget assumes a reduction in payables of about 0.8 percentage point of GDP.
- Transparency measures recommended:
  - Adopt an explicit definition of arrears, with interest accruing on arrears to suppliers.
  - Request for a fiscal ROSC to help identify changes to bring practices in line with the Code of Good Practices on Fiscal Transparency, especially regarding open budget processes and availability of information.

### Fiscal rules and fiscal responsibility law (FRL)
- Planned revision of the FRL in 2005.
- Authorities will consider a combination of numerical and procedural rules, since sole reliance on numerical rules has not worked well.
- Staff advice: revised rules should be well-defined, consistent, enforceable, and supported by sound policies; transparent procedures needed for monitoring compliance.

### Social security and pension reform
- Objectives:
  - Restore financial viability of the social security sector.
  - Reduce high administrative costs and improve management of the pension reserve fund.
  - Address imbalance between pension contributions and pension benefits.
- Risk without reform:
  - Without reform, the pension reserve fund may be depleted by 2010–12.
- Reform options under consideration:
  - Parametric reforms phased in over time, such as changes in the retirement age and the rate at which benefits accrue.
  - Comprehensive pension reform with implementation phased over a number of years to eliminate current operating deficits and align pension fund incomes with future pension obligations.
- Other concerns: maternal and health care program of social security is no longer financially viable; reform alternatives being evaluated.

### Treatment of the Panama Canal Authority (PCA) and Canal expansion
- PCA excluded from public sector accounts for policy purposes, including future revision of fiscal rules:
  - Authorities’ rationale: PCA is an autonomous state enterprise under the Constitution; its surpluses are unavailable to meet fiscal needs; separation helps demonstrate commercial operation and preserve managerial independence.
  - Staff and authorities agreed to present both the authorities’ fiscal balance (excluding the Canal Authority) and the more comprehensive measure including the PCA as part of the public sector.
  - Staff noted the PCA appears not to meet all criteria for being considered commercially run (for instance, exemption from corporate income tax and lack of private equity).
- Canal expansion:
  - Prospective expansion, if approved in a national referendum, could provide a major boost to service exports by the middle of the next decade.
  - Separation of the PCA from fiscal accounts seen as essential by authorities to promote market perception of PCA’s commercial soundness and to secure an investment grade credit rating for the PCA.

### Debt management
- Strategy: balance cost and risk in mix of external and domestic deficit financing; restructure maturities to smooth maturing debt.
- Specifics:
  - Following retirement of US$400 million in Brady bonds in Q1 2004, US$370 million remains; buybacks not planned in the near term.
  - US$350 million line of credit from the BNP to the government (initially drawn as short-term liquidity loan in mid-2004) will be repaid over 11 years; mission recommended more rapid repayment to replenish BNP’s foreign assets faster.
- Staff recommendation: further develop domestic public debt market by gradually increasing share of domestic financing through competitive auctions of government securities.

### Financial sector policies
- Strategy for banking system: emphasize crisis prevention, transparency, and market discipline; close supervision with emphasis on early detection and prompt correction of bank problems.
- Key points:
  - No lender of last resort for dollarized system; no contingent line of credit abroad for the BNP, due to moral hazard concerns.
  - Banks maintain relatively high levels of liquidity.
  - At end-September 2004, the liquid assets-to-deposits ratio was 27 percent (42 percent, if marketable securities are included).
  - Strengthened regional supervisory coordination in 2003–04; participation in a regional financial sector review by MFD.
  - Superintendency of Banks preparing for adoption of Basel II principles.
  - Strategic plans being prepared for the National Bank of Panama (BNP) and the Savings Bank to improve governance, adherence to commercial banking practices, and gradual reduction in outstanding credit to government.
  - Staff suggested evaluation of state banks should extend to the National Mortgage Bank and the Agricultural Development Bank.

### Competitiveness and growth policies
- External competitiveness indicators:
  - Real effective exchange rate remained lower in 2004 than preceding several years.
  - Volume of merchandise exports accelerated in 2002–04, though growth did not keep pace with export markets in 2004.
  - Panama expanded market share for certain service exports (notably tourism and port services).
  - External current account deficit projected to fall below 2 percent of GDP in 2005.
- Broader competitiveness concerns:
  - Panama ranked 58th out of 104 countries in the World Economic Forum competitiveness report, reflecting perception of weak public institutions.
  - Exports of goods and services grew only slightly faster than GDP over five years to 2004: annual average growth rates of 3½ percent (exports) and 3¼ percent (GDP).
- Trade policy and FTA with United States:
  - Prospective FTA would offer greater permanence than the Caribbean Basin Initiative, boost market access for export-oriented services, encourage regional foreign investors, and enhance legal framework for U.S. investors.
  - Future trade agreements may be sought with Singapore and additional Central American countries.
- Government medium-term growth strategy:
  - Focus on export-oriented service sector as Panama’s comparative advantage.
  - Key elements: education reform to meet workforce training needs; ensure adequate economic infrastructure; lower cost of doing business by streamlining bureaucratic requirements.
  - Development of a special economic zone (Howard) with simple administrative procedures and flexible labor rules.
  - Authorities introduced greater labor flexibility for special economic zones in mid-2004 (rules for working at night and on weekends, hiring/laying off according to demand fluctuations, conflict resolution, productivity clauses).
  - Staff recommended generalizing such labor flexibility rules to other regions.
- Governance and anti-corruption:
  - Authorities repealed a decree impeding implementation of the Law on Transparency; established a national council for transparency and anti-corruption; undertaken audits of government contractors and public sector institutions.
  - Staff welcomed emphasis on good governance and efficiency improvements (streamlining bureaucratic requirements, transparent procurement, simplifying export procedures).

### Medium-term outlook and risks (scenarios to 2009)
- Active scenario (staff-prepared):
  - Assumptions: full implementation of February 2005 fiscal reforms, social security reform, conclusion of a free trade agreement with the United States, and adoption of any additional fiscal measures needed to achieve the authorities’ medium-term deficit target of 1 percent of GDP by 2007.
  - Expected outcomes:
    - Boost to confidence from improved fiscal position, growth-oriented structural reforms, and enhanced transparency and governance.
    - Primary balance stabilizing at 3½ percent of GDP.
    - Public debt would decline steadily to 53 percent of GDP by 2009, and 38 percent by 2014.
- Low-case scenario:
  - Assumptions: fiscal reforms begun in early administration not sustained; incomplete implementation of early-2005 fiscal reforms; no pension reform or other new structural reforms.
  - Expected outcomes:
    - Public debt would rise to 70 percent of GDP by 2009, from a projected 64 percent in 2005.
    - Growth would slow to 2½ percent, owing to erosion of confidence and decline in investment activity.
    - Inflation projected to remain low due to full dollarization.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0607.pdf*

### 37.      An expansion of the Panama Canal is being studied, which could have a far-

### _cr0607 - 37.      An expansion of the Panama Canal is being studied, which could have a far-

### Panama Canal expansion: scope, timing, and financing considerations
- Feasibility studies, "covering engineering, environmental, financial, geological, and hydrological aspects of the canal expansion as well as market research in the shipping sector," may be completed in the first half of 2005.
- Project timing in source:
  - Might begin in 2007.
  - Might be completed around 2014.
- Potential investment magnitude and phasing:
  - Could total some 30–35 percent of GDP.
  - Macroeconomic impact assessment (including labor market and inflation) depends on the magnitude and phasing of the investment.
- Authorities’ financing strategy for the Panama Canal Authority (PCA):
  - PCA to obtain an investment-grade credit rating and secure needed financing without government guarantees, possibly through a revenue bond.
  - PCA’s potential for self-financing through retained earnings would be boosted by a proposed increase in Canal tolls on container ships, prospectively in three stages starting May 2005 (Box 3).
  - The implications for the government’s contingent fiscal liability depend on the project’s financing plans.

### Risks to staff projections and scenarios
- Oil price volatility and uncertainty:
  - Could cause Panama’s export markets and world trade to grow more slowly than anticipated, causing exports to fall short of projections.
  - Higher than projected oil prices for a sustained period would adversely affect growth through lower disposable incomes and weaker domestic demand.
- Exchange rate and global interest rate shocks:
  - Unexpected instability of the U.S. dollar or abruptly higher global interest rates could put Panama’s exports of goods and services on a lower path than assumed.
  - Higher international interest rates would be reflected in higher domestic interest rates and dampen sectors such as construction.
- Active scenario specific risks and potentials:
  - Downside risk: inability of the administration to build consensus for needed reform of the pension system.
  - Upside potential: a strong fiscal adjustment effort could give a greater boost to confidence and private sector investment than assumed, raising output growth above the scenario.
- Passive scenario risks:
  - A deteriorating fiscal stance could erode confidence more than envisaged, substantially lowering private investment and economic growth, with feedback effects on credit ratings and fiscal borrowing costs.
  - Such erosion could jeopardize prospects for expansion of the Canal despite the constitutional provision for the Canal Authority’s autonomy.

### Fiscal stance, reforms, and policy recommendations (staff appraisal highlights)
- Recent and near-term macroeconomic outlook:
  - Panama’s economy experienced a strong recovery since late 2003.
  - Growth likely to slow down in 2005 but still provide for a further decline in unemployment.
- Fiscal policy priorities and challenges:
  - Main challenges: strengthen government finances in 2005 and beyond; reform the public pension system to restore long-term viability; settle arrears to domestic suppliers.
  - The authorities’ strategy emphasizes fiscal discipline, transparency, and good governance.
- Authorities’ fiscal program assessment:
  - The targeted fiscal deficit of 3.6 percent of GDP for 2005 (excluding the PCA surplus) represents a strong adjustment effort.
  - Fiscal reform includes tax reform and expenditure measures reflecting equity considerations.
  - The fiscal reform provides for additional revenues on top of a prudent budget and intends to eliminate payables over 90 days when feasible.
  - Strict implementation and close monitoring of fiscal measures will be essential given uncertainty about impacts in 2006–07.
- Expenditure management:
  - Emphasis on expenditure restraint is appropriate: reduce overstaffing, improve efficiency of current expenditure, and improve public investment evaluation.
  - Development of a medium-term expenditure framework is recommended to introduce multi-year planning for infrastructure.
- Tax reform and revenue measures:
  - Proposed tax reform focuses on improving equity by establishing an alternative minimum income tax, including representation expenses in taxable income, closing corporate tax loopholes, and curbing poorly targeted fiscal incentives.
  - Measures expected to improve tax buoyancy and efficiency; elimination of low-yielding taxes and stiffer penalties to enhance efficiency.
- Social security and pension reform:
  - Pension system judged too generous relative to contribution rates, generating a large and growing volume of unfunded pension obligations.
  - Comprehensive reform with multiple parametric changes likely to be implemented over years; immediate priorities include improvements in portfolio management and elimination of overstaffing in social security.
  - Reform needs extend to health and maternal care program funding and provision.
- Fiscal rules and transparency:
  - The fiscal responsibility law did not function properly; its suspension provides an opportunity to reformulate fiscal rules for greater effectiveness.
  - Revised rules should emphasize procedural rules alongside numeric rules, and be well-defined, transparent, enforceable, and consistent.
  - Authorities’ decision to assess fiscal transparency practices through a fiscal ROSC is welcome; presentation of fiscal accounts both excluding and including PCA is appropriate.
  - Enhancements to transparency recommended: explain government’s view on both balances, define domestic arrears clearly, and accrue interest on arrears to suppliers.

### Financial sector, governance, and competitiveness
- Financial system assessment:
  - Financial system is "essentially sound."
  - Expansion of regional banking increases the need for effective supervision; Superintendency of Banks is improving coordination across countries.
  - Governance needs strengthening in the BNP and the Savings Bank; business plans should be based on sound commercial practices and ensure BNP credit to government remains short-term.
- Private sector competitiveness:
  - Authorities rightly prioritize policies to foster competitiveness and productivity; education reform is important to supply a well-trained workforce.
  - Emphasis on good governance and "zero tolerance" for corruption could reduce costs and improve competitiveness.
  - Greater labor market flexibility would be beneficial; consider selectively extending flexible employment practices realized in special economic zones to other sectors, especially the export-oriented service sector.
- Trade integration:
  - A prospective free trade agreement with the United States signals commitment to further integration and can help attract foreign investors with regional strategies, provide assurance of a stable legal framework, and encourage resource movement to more productive sectors.

### Data, ROSCs, and technical assistance
- Data quality and coverage:
  - Timeliness and coverage of economic statistics generally adequate for monitoring, but weaknesses remain, especially national income accounts, fiscal statistics, and labor market data.
  - Authorities expressed interest in a data module ROSC to identify shortcomings and recommend improvements.
- Planned collaboration and assistance:
  - Staff plans a follow-up to the OFC Module 2 assessment for the financial sector.
  - Fiscal and data module ROSCs will identify opportunities for technical assistance; staff stands ready to assist in other supportive areas.
- Article IV consultation timing:
  - Proposed that the next Article IV consultation with Panama take place on the standard 12-month cycle.

### Key numeric facts and targets (preserved exactly as in source)
- Feasibility studies completion: first half of 2005.
- Project possible start: 2007.
- Project possible completion: around 2014.
- Potential investment size: some 30–35 percent of GDP.
- Proposed toll increases starting: May 2005 (in three stages).
- Targeted fiscal deficit for 2005 (excluding PCA surplus): 3.6 percent of GDP.
- Fiscal reform objective: fiscal deficit of 1 percent of GDP in 2007 or an adjustment of about 4 percentage points of GDP in three years.
- Fiscal Responsibility Law (FRL) original net debt target: decline to 50 percent by 2017 (from approximately 58 percent in 2002).
- FRL fiscal deficit ceiling: 2 percent of GDP in any given year (as framed under FRL).
- PCA financial indicators from Box 3 (as presented):
  - Profitability: 10.8
  - Debt level: 6.3
  - Debt cost: 0

*IMF staff report content as presented in the supplied PDF excerpt.*

### 9. Protects shareholders rights... 10/no

### _cr0607 - 9. Protects shareholders rights... 10/no

### Panama Canal Authority: governance, operations, and fiscal interactions
- A new tolls pricing structure was approved in August 2002; a two-phase toll increase was implemented by an average of 8 percent in October 2002 and an additional 4.5 percent in July 2003. Operating results of the ACP during FY 2003 showed an increase in net income and profitability as a result of the toll and transit tonnage increase.
- The toll pricing structure applicable to container ships was to be reformed effective May 1, 2005, with a three-stage toll increase: by 35 percent in May 2005, and an additional 17 percent and 10 percent in January 2006 and January 2007, respectively.
- Employment regime: based on a merit system; the provisions of the Labor Code do not apply.
- The Canal Authority's budget has to be submitted to Parliament, which must approve or reject it without modifications.
- Tax and transfers:
  - The Canal Authority is exempt from corporate income tax.
  - It transfers tolls and fees to the government equivalent to 1.1 percent of GDP in 2003.
  - It distributes part of its net profit to the government as a dividend equivalent to 0.8 percent of GDP in 2003.
- Additional indicators and notes:
  - Net profits as a percentage of net worth during fiscal year 2003 (ended September 30, 2003) are reported in the source tables and figures.
  - Liabilities are reported as percent of total assets.
  - Debt comprises payables that do not bear interest.
  - The high profitability and low debt cannot be compared to industry-wide average in the country.
  - There are no minority shareholders.

### Structural characteristics and sectoral composition
- Sectoral shares of total value added, 1996–2003: service sector large and expanding; service sector composition in 2003 (in percent of GDP in services):
  - Housing (21.1 percent)
  - Public utilities (4.2 percent)
  - Colon free zone wholesale trade (8.6 percent)
  - Other services (7.5 percent)
  - Financial intermediation (10.3 percent)
  - Public administration (13.1 percent)
  - Other transport and communications (15.7 percent)
  - Panama Canal Authority (6.6 percent)
  - Restaurants, hotels, and commerce (12.8 percent)
- Real GDP growth and unemployment, 1998–2004: charts show GDP constant 1996 prices (percent change) and national unemployment rate (percent of labor force).

### Export performance and services
- Export trends, 1993–2004:
  - Exports of services increased; Panama's market share is growing for tourism and port services.
  - Export market shares for merchandise have trended downward since the late 1990s.
  - Offshore banking (assets deposited in offshore centers, as reported by banks to BIS) market share has declined.
- Growth indicators and indices referenced in figures:
  - Tourism revenue growth, ports revenue growth, real non-oil export growth, and market share indices (1992=100) are shown for 1993–2004.

### Fiscal indicators, revenue trends, and public sector balances
- Revenue and expenditure trends (1998–2004 estimates and 2005 projections):
  - Overall deficit (right scale) and total revenue and total expenditure (left scale) depicted in Figure 3.
  - Revenue is declining and the deficit is increasing; tax buoyancy is low and trending downward.
  - Tax reform: Dec. 2002 referenced in the timeline.
- Tabled central government and nonfinancial public sector indicators (selected exact figures):
  - Nominal GDP (millions of balboas): 2001: 11,808; 2002: 12,272; 2003: 12,862; 2004: 13,793; 2005: 14,531 (memorandum in Table 1).
  - Nonfinancial public sector revenue and grants (percent of GDP): 2001: 23.8; 2002: 22.9; 2003: 22.4; 2004: 21.3; 2005 Est./Proj.: 22.5 (Table 2/Table 1 as presented).
  - Balance, excluding Canal Authority (percent of GDP): 2001: -2.3; 2002: -3.3; 2003: -4.7; 2004: -5.0; 2005: -3.6 (Table 1).
  - Balance, including Canal Authority (percent of GDP): 2001: -1.8; 2002: -2.7; 2003: -3.8; 2004: -3.3; 2005: -2.1 (Table 1).
  - Nonfinancial public sector debt (percent of GDP): 2001: 64.7; 2002: 63.7; 2003: 63.3; 2004: 68.1; 2005: 63.7 (Table 1).
  - Primary balance (incl. PCA) (percent of GDP): 2000: 4.8; 2001: 2.5; 2002: 1.5; 2003: 0.6; 2004: 1.3; 2005: 2.4; 2005 proj.: 2.6 (Table 2/Table summary).

### Medium-term scenarios and projections (2002–09)
- Alternative scenarios presented (Figure 8):
  - Two scenarios: Active and Low-case.
  - GDP Growth (In percent) projected for 2002–2009 under Active and Low-case trajectories (charts shown).
  - Overall Fiscal Balance (Percent of GDP), Primary Balance (In percent of GDP), Public Sector Debt (In percent of GDP), External Debt Service (In percent of GDP), Current Account (In percent of GDP) are presented for 2002–2009 under Active and Low-case scenarios.
  - Note 1/ to Figure 8: The low-case scenario assumes a lower growth and a higher fiscal deficit than the active; the active scenario assumes a lower deficit path, as indicated in the top two panels.
  - Note 2/ excludes the Panama Canal Authority.

### Banking sector performance and monetary accounts
- Credit and deposits:
  - Domestic deposits and credit grew in 2004, while foreign operations stabilized at a low level after the regional shock of 2001−02 (Figure 4).
- Interest rates and spreads (2000−04):
  - Domestic deposit rates slowly converged to international rates; convergence occurred when the 2001–02 regional financial turmoil receded.
  - Lending rates (especially of domestic banks) declined by less, as local banks focus on long-term mortgage financing (Figure 5).
- Commercial bank performance indicators (selected exact figures from Table 5):
  - Nonperforming loans as percent of total loans, banking system: 2003: 3.3; 2004 Mar: 3.2; Jun: 2.9; Sep: 2.7; Dec: 2.8; 2004 overall: 2.1; 2004 (last column) 2.0 (table multiple columns).
  - Ratio of provisions to nonperforming loans, banking system: various values including 2003: 145.4, 2004 Mar: 128.1, Jun: 125.9, Sep: 135.6, Dec: 126.1, 2004 overall: 160.3, and 151.2 in another column (as reported).
  - Pretax return on average assets, banking system: 2003: 2.3; 2004 Mar: 2.2; Jun: 2.3.
  - Liquid assets to total deposits, banking system: 2003: 29.4; 2004 Mar: 29.1; Jun: 31.1; Sep: 27.3; Dec: 28.6; 2004 overall: 28.0; final column: 26.7; 26.5 also reported.
  - Ratio of capital to risk-weighted assets, domestic banks: 2003: 14.8; 2004 Mar: 17.1; Jun: 17.6; Sep: 17.5; Dec: 17.8; other columns report 19.8 and 19.6.
  - Foreign banks' share of banking system assets (in percent): ranges reported, e.g., 50.1, 50.1, 43.8, 43.3, 43.5, 42.5, 41.5, 41.1, 42.5, 42.8 (various snapshots).
- Monetary accounts (Table 4, selected exact figures):
  - Net foreign assets (millions of balboas at end of period): 2000: 1,506; 2001: 1,693; 2002: 1,744; 2003: 2,488; 2004: 2,706; 2005: 2,869 (Prel./Proj. as labeled).
  - Private sector credit (millions): 2000: 10,851; 2001: 11,735; 2002: 10,891; 2003: 11,105; 2004: 12,296; 2005: 13,284.
  - Total deposits (millions): 2000: 8,952; 2001: 9,805; 2002: 9,875; 2003: 10,305; 2004: 11,121; 2005: 11,904.
  - M2 (12-month percent change): reported in Table 4 and Table 8: 2000: 8.9; 2001: 9.5; 2002: 0.9; 2003: 4.6; 2004: 8.2; 2005 proj.: 7.0.

### External sector, balance of payments, and public external debt
- Balance of payments and current account (Table 6, selected exact figures):
  - Current account (millions of U.S. dollars): 2000: -689; 2001: -174; 2002: -61; 2003: -442; 2004: -273; 2005 proj.: -211.
  - Trade balance excluding Colon Free Zone (millions): 2000: -1,658; 2001: -1,225; 2002: -1,382; 2003: -1,476; 2004: -1,611; 2005 proj.: -1,711.
  - Services, net (millions): 2000: 854; 2001: 899; 2002: 981; 2003: 1,254; 2004: 1,411; 2005 proj.: 1,574.
  - Income, net (millions): 2000: -577; 2001: -602; 2002: -250; 2003: -820; 2004: -884; 2005 proj.: -922.
  - Current transfers, net (millions): 2000: 177; 2001: 226; 2002: 244; 2003: 241; 2004: 259; 2005 proj.: 273.
- Gross external debt flows and debt service (Table 7 and Table 8):
  - External debt (millions of U.S. dollars): 2000: 5,604; 2001: 6,263; 2002: 6,349; 2003: 6,503; 2004: 7,259; 2005 proj.: 7,196.
  - Total public sector debt (gross) per official definitions (memorandum): 2000: 7,732 (in millions); 2001: 8,401; 2002: 8,521; 2003: 8,661; 2004: 9,869; 2005 proj.: 9,675.
  - Total (public) debt as percent of GDP (Table 8 / Table 8 summary): 2000: 59.8; 2001: 64.7; 2002: 63.7; 2003: 63.3; 2004: 68.1; 2005 proj.: 63.7.
  - Debt service metrics (Table with disbursements and debt service): Debt service as percent of exports of goods and services: reported values include 21.3, 26.3, 38.8, 19.5, 25.4 (various years as tabulated).

### External indicators and vulnerability metrics
- Indicators of external position and financial vulnerability (Table 9, selected exact figures):
  - Broad money (12-month percent change): 2000: 8.9; 2001: 9.5; 2002: 0.9; 2003: 4.6; 2004: 8.2.
  - Private sector credit (12-month percent change): 2000: 5.4; 2001: 8.1; 2002: -7.2; 2003: 2.0; 2004: 10.7.
  - Deposit rate (6-month; in percent) 1/: 2000: 6.5; 2001: 5.5; 2002: 3.8; 2003: 3.6; 2004: 2.2.
  - Merchandise exports (12-month percent change): 2000: 22.8; 2001: 3.0; 2002: -10.1; 2003: 1.8; 2004: 12.8.
  - Current account balance (percent of GDP): 2000: -5.9; 2001: -1.5; 2002: -0.5; 2003: -3.4; 2004: -2.0.
  - Net international reserves at end of period (millions of U.S. dollars): 2000: 707; 2001: 1,116; 2002: 1,171; 2003: 1,013; 2004: 633.
  - REER, percent change (depreciation -): 2000: -0.7; 2001: -1.3; 2002: -0.2; 2003: -6.5; 2004: -0.4.
  - Exchange rate (balboas per U.S. dollar): 1.0 (2000–2004).

### Social and development indicators
- Social indicators and MDG-related metrics (Table 10 and Table 11, selected exact figures):
  - Rank in 2004 UNDP Human Development Index (out of 177 countries): 61.
  - GDP per capita PPP, U.S. dollars (2002): Panama: 6,170; Latin America and Caribbean average: 4,842.
  - Life expectancy at birth (years) (2002): Panama: 74.6; regional average: 71.2.
  - Under-5 mortality (per 1,000 live births) (2002): Panama: 23; regional average: 39.
  - Poverty benchmarks and Millennium Development Goals status table entries include:
    - Halve extreme poverty: 1990 benchmark 31.4; 2015 goal 15.7; latest estimate 23.9 (2000) — status: On track.
    - Halve malnutrition: goal 3.4; estimate 6.8 (1997) — status not specified.
    - Primary school enrollment: latest estimate 99.0 (2001) — status: On track.
    - Maternal health: raise contraceptive prevalence rate (percent of women ages 15–49) reported as 58.2 (1984) — status mixed.

### IMF relations, technical assistance, and multilateral partnerships
- IMF relations (Appendix I):
  - Membership status: Joined March 14, 1946; Article VIII.
  - Quota: 206.60 SDR million; Fund holdings of currency: 218.08 (SDR million); Reserve position in the Fund: 11.86 (SDR million).
  - Outstanding purchases and loans: Extended Arrangement 23.33 SDR million (11.29 percent of quota).
  - Financial arrangements: Stand-By and EFF arrangements listed with approval dates and amounts (as tabulated).
  - Safeguards Assessment: National Bank of Panama external audit mechanism assessed adequate as of July 12, 2001.
  - Exchange rate arrangement: Panama uses the U.S. dollar as the primary means of payment; balboa fixed at B 1 per U.S. dollar; accepted obligations of Article VIII, Sections 2(a), 3, and 4.
  - Technical assistance: missions and expert visits from MFD and STA in May 2001, April 2001, September 2002, and February 2004 for Basel Core Principles review, national accounts compilation, CPIS participation, and GFSM2001 implementation support.
- Relations with Inter-American Development Bank (Appendix II):
  - IDB program objectives: promote environmentally sustainable growth and reduce poverty and inequality; portfolio focuses on competitiveness and growth (39 percent) and social sector development (38.9 percent).
  - 2005 program includes three project loans amounting to US$70 million for: cleaning up Panama City bay; capacity building for free trade agreements; support of hydrological works in the Panama Canal.
  - IDB lending operations as of December 31, 2004: total ongoing operations disbursed US$313.2 million, undisbursed US$342.7 million; total operations since 1960: US$2,103.3 million.
- Relations with the World Bank (Appendix III):
  - Current portfolio (as of report): four IBRD projects under implementation totaling US$98 million, of which about US$65 million are undisbursed.
  - Potential Interim Strategy Note (ISN) through FY06, possible projects: Public Expenditure Review and Poverty Assessment; two possible operations requested by previous government: Second Rural Poverty and Natural Resources Project (US $38 million) and Canal Watershed Management Project (US $11 million), subject to demand-driven lending.

*Source: Panama—Selected IMF staff report content and appendices as provided in the supplied PDF content.*

### APPENDIX                                                                        IV

### APPENDIX IV

### Panama — Statistical Issues: Overview and Key Findings
- Economic statistics are generally adequate for monitoring purposes, but more timely reporting is needed.
- Need to improve coordination between the Comptroller General’s Office (responsible for official economic statistics) and other government entities, including the Ministry of Economy and Finance.
- Panama has participated in the Fund’s General Data Dissemination System (GDDS) since December 2000; metadata are posted on the Dissemination Standards Bulletin Board (DSBB).

### 1. Real sector
- National accounts:
  - Revision completed in 2004, based on the 1993 SNA, with base year changed from 1982 to 1996.
  - Revised data available for the period 1996−2003.
- Consumer Price Index:
  - New CPI introduced in the second half of 2004, based on weights of the 1997/98 household survey; this index has national coverage (previous one limited to Panama City).
  - Two additional regional indices introduced: one for Panama and San Miguelito and one for the remaining urban areas.
  - Time lags are long; the latest CPI data are for June 2004.
- Technical assistance:
  - The United Nations Economic Commission for Latin America and the Caribbean is supporting development of a supply-use table.

### 2. Government finances
- Current status:
  - Data on central government finances, public enterprises, and agencies are compiled only on a cash basis.
  - Monthly and quarterly data for operations of the budgetary central government are available through September 2004.
- Pending issues and data gaps:
  - Monitoring would be facilitated by: accrual-basis data, more timely reporting, improved consistency of intrapublic sector transfer information, and complete coverage of the investment program.
  - In September 2004 authorities decided to exclude the operational balance of the Panama Canal Authority (PCA) from the nonfinancial public sector definition used for fiscal policy purposes, but agreed to also present a more comprehensive measure including the PCA.
  - For PCA inclusion in comprehensive fiscal accounts, consistent and timely PCA statistics on a calendar year basis are needed.
  - Need to broaden the integrated financial administration system’s (SIAFPA) scope of coverage and to address unrecorded expenditures that have caused persistent and significant discrepancies in fiscal performance measurement from above and below the line.
- Technical assistance:
  - A STA mission in February 2004 reviewed coverage and methodology in fiscal accounts, made several recommendations, and prepared a tentative timetable for migration to the Government Finance Statistics Manual 2001 (GFSM 2001).
  - Authorities have received STA technical assistance directed toward adoption of GFSM 2001.

### 3. Monetary accounts
- Monthly data provision by monetary authorities has been regular and reasonably current.
- Monthly data on private commercial and savings banks are prepared by the Superintendency of Banks and reported to STA with a lag of one to two months.
- State-owned development banks (the Agricultural Development Bank and the Mortgage Bank) are not regulated by the Superintendency of Banks; no data on these banks are reported to the Fund.
- Lack of consistent data on the financial positions of the National Mortgage Bank and the Agricultural Development Bank.

### 4. Balance of payments
- Compilation progress has been substantial, but data are subject to sizeable revisions each quarter.
  - Revised estimates of merchandise imports, transportation services, and foreign direct investment often result in substantial revisions of current and financial accounts.
  - Revisions may reflect improved coverage, but also indicate room for improvement in quality control procedures.
- Specific needs:
  - Improve quality of Colon Free Zone statistics.
  - Complete reconciliation between banking sector data and balance of payments capital flows consistent with the 2002 Superintendency of Banks compilation method.
  - Data not yet available on nonfinancial private sector debt or on transactions involving financial derivatives.
- International Investment Position:
  - Data compiled for 1995−2003.
- Timeliness:
  - Most recent balance of payments statistics pertain to September 2004.

### Table of Common Indicators Required for Surveillance (as of February 16, 2005) — Selected items
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: 12/2004
  - Date received: 01/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: A
- Broad Money:
  - Date of latest observation: 12/2004
  - Date received: 02/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M
- Central Bank Balance Sheet:
  - Date of latest observation: 12/2004
  - Date received: 01/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: A
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: 12/2004
  - Date received: 2/05/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M
- Interest Rates:
  - Date of latest observation: 12/2004
  - Date received: 02/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M
- Consumer Price Index:
  - Date of latest observation: 6/2004
  - Date received: 8/2004
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest observation: 9/2004
  - Date received: 11/2004
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of publication: Q
- External Current Account Balance:
  - Date of latest observation: 9/2004
  - Date received: 01/2005
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of publication: Q
- GDP/GNP:
  - Date of latest observation: 2003
  - Date received: 4/2004
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of publication: A
- Gross External Debt:
  - Date of latest observation: 12/2004
  - Date received: 01/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M

### Panama — Debt Sustainability Analysis (selected scenarios and projections)
- Active scenario (broadly consistent with the authorities’ medium-term fiscal targets):
  - Implementation of the February 2005 fiscal reform, followed by social security reform and other supportive measures, would result in a primary surplus of about 3½ percent of GDP by 2008–09.
  - Structural reforms would boost real GDP growth to 4 percent a year.
  - Public debt would decline to 53 percent of GDP by 2009.
  - If the primary surplus of 3½ percent of GDP were maintained, the debt ratio would decline to 38 percent by 2014.
- Low-case scenario (assumes fiscal slippage from the authorities’ fiscal program):
  - Assumes no pension reform nor implementation of the government’s competitiveness strategy, and assumes easing of the fiscal stance offsets positive fiscal impact of authorities’ measures in 2006–08.
  - Primary surplus projected at about 1.2 percent of GDP in 2006 (excluding the Panama Canal Authority), then starting to decline in 2007.
  - Debt-to-GDP ratio would increase to 70 percent by 2009, from 64 percent in 2005.
  - Consequences: large gross financing needs, growing interest payments, and a sustained rise in public debt relative to fiscal revenue.
- Vulnerabilities and shocks:
  - Under the active scenario, potential temporary shocks would be manageable, delaying by two or three years the downturn in the debt ratio.
  - The principal vulnerability is risk of sustained fiscal slippage as in the low-case scenario; adding growth or interest rate shocks to the low-case scenario would accelerate increases in public debt ratios.
- Exchange rate regime implication:
  - In a fully dollarized economy, debt sustainability is a fiscal issue rather than a potential balance of payments problem.
  - External debt would be vulnerable to simultaneous shocks to several key parameters, particularly in the low-case scenario where fiscal program implementation is partial.

*Source: APPENDIX IV — PANAMA, _cr0607 - APPENDIX IV*

### APPENDIX                                                                        V

### _cr0607 - APPENDIX V

### Medium-Term Macroeconomic Framework — Active Scenario (Table 1)
- Economic growth and prices (Percent change)
  - Real GDP at market prices: 4.3 (2003), 6.0 (2004), 3.5 (2005), 4.0 (2006), 4.0 (2007), 4.0 (2008), 4.0 (2009)
  - Real domestic demand: 3.5, 4.4, 2.5, 2.6, 3.3, 3.7, 3.7
  - GDP deflator: 0.5, 1.2, 1.8, 2.4, 1.9, 1.7, 1.7
  - CPI (period average): 1.0, 0.5, 2.4, 1.8, 1.5, 1.5, 1.5
  - CPI (end of period): 0.1, 2.0, 2.0, 1.5, 1.5, 1.5, 1.5
- Savings and investment (In percent of GDP)
  - National savings: 18.0, 20.0, 19.1, 21.1, 22.5, 23.7, 24.8
  - Public sector savings: 1.0, 0.9, 2.0, 4.4, 5.5, 5.8, 6.0
  - Private sector savings: 17.0, 19.1, 17.2, 16.7, 17.0, 18.0, 18.8
  - Gross domestic investment: 21.5, 22.0, 20.6, 21.7, 22.5, 23.4, 24.0
- Nonfinancial public sector (In percent of GDP)
  - Revenue: 22.4, 21.3, 22.5, 23.8, 24.6, 24.7, 24.7
  - Expenditure: 27.2, 26.3, 26.2, 25.5, 25.4, 25.2, 24.9
  - Primary balance: -0.3, -0.5, 1.1, 2.9, 3.4, 3.5, 3.4
  - Overall balance, excluding Canal Authority: -4.7, -5.0, -3.6, -1.6, -0.8, -0.5, -0.2
  - Canal Authority (balance after transfers/distribution) 1/: 1.0, 1.7, 1.5, 2.0, 2.2, 2.2, 2.1
  - Balance, including Canal Authority: -3.8, -3.3, -2.1, 0.4, 1.5, 1.7, 1.8
  - Net external financing, excluding Canal Authority: 2.4, 1.1, 3.7, 1.3, 0.7, 0.5, -0.6
  - Net domestic financing, excluding Canal Authority: 2.4, 3.9, -0.1, 0.4, 0.0, 0.0, 0.8
  - Canal Authority financing: -1.0, -1.7, -1.5, -2.0, -2.2, -2.2, -2.1
  - Total public debt: 63.3, 68.1, 63.7, 61.1, 58.4, 55.6, 52.9
  - Total interest payments (as percent of debt): 6.9, 6.7, 7.5, 7.3, 7.2, 7.0, 6.9
- External (In percent of GDP)
  - Exports, f.o.b. 2/: 7.7, 8.1, 8.1, 8.1, 8.3, 8.6, 8.9
  - Imports, f.o.b. 2/: -19.2, -19.8, -19.8, -19.5, -19.3, -19.2, -19.3
  - Net exports of Colon Free Zone: 2.8, 4.0, 4.0, 3.9, 4.0, 4.0, 4.1
  - Current account balance: -3.4, -2.0, -1.5, -0.5, 0.0, 0.3, 0.8
  - External debt: 50.5, 52.6, 49.5, 47.8, 45.8, 43.7, 40.8
- Memorandum items:
  - Nominal GDP (millions of U.S. dollars): 12,862 (2003), 13,793, 14,531, 15,469, 16,400, 17,354, 18,347
  - Gross financing requirements — Total: 1,211, 1,304, 799, 750, 320, 648, 221
  - Gross financing requirements — External: 492, 570, 586, 632, -365, 554, -313

### Medium-Term Macroeconomic Framework — Low-Case Scenario (Table 2)
- Economic growth and prices (Percent change)
  - Real GDP at market prices: 4.3, 6.0, 3.5, 3.0, 3.0, 2.5, 2.5
  - Real domestic demand: 3.5, 4.4, 2.5, 1.9, 2.5, 2.4, 2.4
  - GDP deflator: 0.5, 1.2, 1.8, 2.1, 1.7, 1.3, 1.3
  - CPI (period average): 1.0, 0.5, 2.4, 1.8, 1.5, 1.5, 1.5
  - CPI (end of period): 0.1, 2.0, 2.0, 1.5, 1.5, 1.5, 1.5
- Savings and investment (In percent of GDP)
  - National savings: 18.0, 20.0, 19.1, 19.6, 19.5, 18.6, 17.6
  - Public sector savings: 1.0, 0.9, 2.0, 2.4, 2.1, 1.5, 0.8
  - Private sector savings: 17.0, 19.1, 17.2, 17.2, 17.4, 17.1, 16.9
  - Gross domestic investment: 21.5, 22.0, 20.6, 20.5, 20.4, 19.8, 19.2
- Nonfinancial public sector (In percent of GDP)
  - Revenue and grants: 22.4, 21.3, 22.5, 22.6, 22.5, 22.4, 22.3
  - Expenditure: 27.2, 26.3, 26.2, 26.2, 26.6, 27.1, 27.7
  - Primary balance: -0.3, -0.5, 1.1, 1.2, 0.8, 0.5, 0.2
  - Overall balance, excluding Canal Authority: -4.7, -5.0, -3.6, -3.5, -4.1, -4.7, -5.4
  - Canal Authority 1/: 1.0, 1.7, 1.5, 2.1, 2.3, 2.3, 2.2
  - Balance, including Canal Authority: -3.8, -3.3, -2.1, -1.4, -1.8, -2.4, -3.2
  - Net external financing, excluding Canal Authority: 2.4, 1.1, 3.7, 3.2, 4.1, 4.7, 5.4
  - Net domestic financing, excluding Canal Authority: 2.4, 3.9, -0.1, 0.3, 0.0, 0.0, 0.0
  - Canal Authority financing: -1.0, -1.7, -1.5, -2.1, -2.3, -2.3, -2.2
  - Total public debt: 63.3, 68.1, 63.7, 63.7, 64.9, 67.2, 70.1
  - Total interest payments (as percent of debt): 6.9, 6.7, 7.5, 7.4, 7.5, 7.7, 7.9
- External (In percent of GDP)
  - Exports, f.o.b. 2/: 7.7, 8.1, 8.1, 8.1, 8.2, 8.3, 8.4
  - Imports, f.o.b. 2/: -19.2, -19.8, -19.8, -19.5, -19.3, -19.4, -19.5
  - Net exports of Colon Free Zone: 2.8, 4.0, 4.0, 3.9, 3.8, 3.8, 3.8
  - Current account balance: -3.4, -2.0, -1.5, -0.8, -0.9, -1.2, -1.6
  - External debt: 50.5, 52.6, 49.5, 50.3, 52.1, 54.8, 58.2
- Memorandum items:
  - Nominal GDP (millions of U.S. dollars): 12,862, 13,793, 14,531, 15,279, 16,004, 16,623, 17,264
  - Gross financing requirements — Total: 1,211, 1,304, 799, 1,038, 854, 1,351, 1,110
  - Gross financing requirements — External: 492, 570, 586, 922, 494, 1,254, 727

### Balance of Payments — Active Scenario (Table 3)
- Current account (millions of U.S. dollars): -442 (2003), -273 (2004), -211 (2005), -82 (2006), -65 (2007), 91 (2008), 49 (2009)
- Trade balance excluding Colon Free Zone (millions of U.S. dollars): -1,476, -1,611, -1,711, -1,752, -1,788, -1,850, -1,906
- Merchandise exports, f.o.b. (millions): 987, 1,113, 1,171, 1,259, 1,369, 1,488, 1,628
- Merchandise imports, f.o.b. (millions): -2,463, -2,724, -2,883, -3,012, -3,158, -3,338, -3,534
- Net exports from Colon Free Zone (millions): 359, 552, 575, 611, 652, 699, 747
- Re-exports, f.o.b. (millions): 4,057, 4,941, 5,149, 5,468, 5,842, 6,258, 6,692
- Imports for Colon Free Zone, f.o.b. (millions): -3,698, -4,389, -4,574, -4,857, -5,189, -5,559, -5,945
- Services, net (millions): 1,254, 1,411, 1,574, 1,766, 1,902, 1,998, 2,100
  - Travel, net: 377, 428, 473, 527, 585, 646, 712
  - Transportation, net: 799, 883, 995, 1,126, 1,197, 1,224, 1,252
  - Other services: 79, 100, 106, 113, 120, 128, 135
- Income, net (millions): -820, -884, -922, -997, -1,080, -1,113, -1,136
  - Private sector income, net: -438, -400, -427, -448, -477, -507, -528
  - Public sector income, net: -382, -484, -494, -548, -603, -606, -608
  - Of which: NFPS interest: -474, -530, -577, -604, -608, -612, -614
- Current transfers, net (millions): 241, 259, 273, 290, 308, 326, 344
- Capital and financial account (millions): 163, 409, 371, 242, 165, 146, 51
  - Financial account — Public sector: 290, 218, 609, 262, 122, 83, -102
  - Nonfinancial public sector: 288, 216, 607, 260, 121, 80, -105
  - National Bank of Panama: -8, -8, -8, -9, -9, -7, -7
  - Private sector, medium and long-term: 430, 708, 684, 741, 784, 819, 867
  - Direct investment: 792, 739, 706, 752, 798, 844, 893
  - Portfolio investment: -59, -64, 0, -2, -10, -233, -236, -264, -275 (table shows negative portfolio numbers across years)
  - Loans: -302, 608, 188, 222, 223, 239, 249
  - Short-term flows: -557, -516, -922, -760, -741, -757, -714
- Overall balance (millions): -149, 682, 160, 160, 160, 205, 200
- Financing and net foreign assets (millions):
  - Financing: 149, 375, -160, -160, -160, -205, -200
  - Net foreign assets of the National Bank of Canada: 158, 380, -150, -150, -150, -200, -200
  - Net use of Fund credit: -9, -5, -10, -10, -10, -50
- Memorandum items (in percent of GDP)
  - Merchandise exports: 7.7, 8.1, 8.1, 8.1, 8.3, 8.6, 8.9
  - Merchandise imports: -19.2, -19.8, -19.8, -19.5, -19.3, -19.2, -19.3
  - Net exports from Colon Free Zone: 2.8, 4.0, 4.0, 3.9, 4.0, 4.0, 4.1
  - Current account: -3.4, -2.0, -1.5, -0.5, 0.0, 0.3, 0.8
  - Direct foreign investment (percent of GDP): 6.2, 5.4, 4.9, 4.9, 4.9, 4.9, 4.9

### Public Sector Debt Sustainability — Active Scenario (Table 4) and Low-Case Scenario (Table 5)
- Public sector debt dynamics (Active scenario, percent of GDP)
  - Public sector debt: 61.5 (1999), 59.8 (2000), 64.7 (2001), 63.7 (2002), 63.3 (2003), 68.1 (2004), 63.7 (2005), 61.1 (2006), 58.4 (2007), 55.6 (2008), 52.9 (2009)
  - Of which: foreign debt: 48.6, 48.2, 53.0, 51.7, 50.6, 52.6, 49.5, 47.8, 45.8, 43.7, 40.8
  - Change in public sector debt: 2.3, -1.7, 4.9, -0.9, -0.4, 4.8, -4.5, -2.6, -2.7, -2.7, -2.8
  - Identified debt-creating flows (4+7+12): -3.6, -0.3, 1.4, 1.1, 1.5, 0.8, 0.2, -2.2, -2.7, -2.7, -2.8
  - Primary balance (deficit= +): -2.4, -3.6, -2.0, -1.0, 0.3, 0.5, -1.1, -2.9, -3.4, -3.5, -3.4
  - Revenue and grants: 24.5, 24.8, 23.8, 22.9, 22.4, 21.3, 22.5, 23.8, 24.6, 24.7, 24.7
  - Primary (noninterest) expenditure: 22.0, 21.2, 21.8, 21.9, 22.8, 21.7, 21.4, 21.0, 21.2, 21.2, 21.2
  - Automatic debt dynamics (contribution from interest rate/growth differential): 0.9, 3.4, 3.4, 2.1, 1.2, 0.3, 1.3, 0.6, 0.7, 0.7, 0.7
  - Contribution from real interest rate: 3.2, 5.0, 3.7, 3.5, 3.7, 3.9, 3.6, 3.0, 3.0, 2.9, 2.8
  - Contribution from real GDP growth: -2.2, -1.7, -0.3, -1.4, -2.6, -3.5, -2.3, -2.4, -2.3, -2.2, -2.1
  - Residual, including asset changes (2-3): 5.9, -1.5, 3.6, -2.1, -1.9, 4.0, -4.7, -0.3, 0.0, 0.0, 0.0
  - Public sector debt-to-revenue ratio: 251.4, 240.9, 271.8, 278.5, 282.4, 320.2, 282.3, 256.2, 236.9, 225.2, 214.3
  - Gross financing need (percent of GDP): 7.3, 6.2, 8.6, 12.3, 10.4, 11.1, 7.0, 6.9, 4.2, 5.9, 3.3
- Stress tests and alternative scenarios (Active scenario)
  - Debt-stabilizing primary balance (assumes key variables remain at last projection year): 0.6 (table shows 0.6 in debt-stabilizing line)
  - A1. Key variables at historical averages in 2005-09: public debt path: 68.1, 62.4, 60.9, 59.7, 58.5, 57.3
  - A2. No policy change (constant primary balance) in 2005-09: public debt path: 68.1, 65.2, 66.0, 67.2, 68.5, 69.8
  - B1–B5 bound tests show public debt responses under shocks to real interest rates, real GDP growth, primary balance, combinations, and a 10 percent of GDP increase in other debt-creating flows.
- Low-case scenario highlights (Table 5)
  - Public sector debt (percent of GDP): 61.5, 59.8, 64.7, 63.7, 63.3, 68.1, 63.7, 63.7, 64.9, 67.2, 70.1
  - Of which: foreign debt: 48.6, 48.2, 53.0, 51.7, 50.6, 52.6, 49.5, 50.3, 52.1, 54.8, 58.2
  - Change in public sector debt: 2.3, -1.7, 4.9, -0.9, -0.4, 4.8, -4.5, 0.1, 1.2, 2.3, 2.9
  - Identified debt-creating flows (4+7+12): -3.6, -0.3, 1.4, 1.1, 1.5, 0.8, 0.2, 0.4, 1.3, 2.3, 2.9
  - Primary balance (deficit= +): -2.4, -3.6, -2.0, -1.0, 0.3, 0.5, -1.1, -1.2, -0.8, -0.5, -0.2
  - Automatic debt dynamics (contribution): 0.9, 3.4, 3.4, 2.1, 1.2, 0.3, 1.3, 1.5, 2.0, 2.7, 3.1
  - Residual, including asset changes: 5.9, -1.5, 3.6, -2.1, -1.9, 4.0, -4.7, -0.3, -0.1, 0.0, 0.0
  - Public sector debt-to-revenue ratio: 251.4, 240.9, 271.8, 278.5, 282.4, 320.2, 282.3, 281.4, 288.6, 300.1, 314.5
  - Gross financing need (percent of GDP): 7.3, 6.2, 8.6, 12.3, 10.4, 11.1, 7.0, 8.9, 7.6, 10.4, 8.7
  - Stress tests (A and B scenarios) show larger adverse debt paths under alternative assumptions and shocks (detailed scenario numbers provided in tables).

### External Debt Sustainability — Active Scenario (Table 6) and Low-Case Scenario (Table 7)
- Active scenario (Table 6, percent of GDP unless indicated)
  - External debt: 48.6 (1999), 48.2 (2000), 53.0 (2001), 51.7 (2002), 50.6 (2003), 52.6 (2004), 49.5 (2005), 47.8 (2006), 45.8 (2007), 43.7 (2008), 40.8 (2009)
  - Change in external debt: -0.3, -0.4, 4.8, -1.3, -1.2, 2.1, -3.1, -1.7, -2.0, -2.1, -2.9
  - Identified external debt-creating flows (4+8+9): 5.1, 0.1, 3.6, -1.9, -4.6, -2.2, -4.6, -5.8, -6.1, -6.2, -6.6
  - Current account deficit, excluding interest payments: 7.3, 2.8, -2.0, -3.2, -0.3, -1.9, -2.5, -3.4, -3.7, -3.9, -4.2
  - Net nondebt creating capital inflows (negative): -2.8, -5.2, 2.9, -0.4, -5.7, -0.7, -3.4, -3.4, -3.4, -3.3, -3.4
  - Automatic debt dynamics: 0.6, 2.5, 2.7, 1.6, 1.3, 0.4, 1.3, 0.9, 1.0, 1.0, 1.0
    - Contribution from nominal interest rate: 2.9, 3.2, 3.5, 3.7, 3.7, 3.8, 4.0, 3.9, 3.7, 3.5, 3.3
    - Contribution from real GDP growth: -1.8, -1.3, -0.3, -1.1, -2.1, -2.8, -1.7, -1.9, -1.8, -1.7, -1.7
    - Contribution from price and exchange rate changes: -0.4, 0.6, -0.5, -0.9, -0.2, -0.6, -0.9, -1.1, -0.9, -0.8, -0.7
  - Residual, including change in gross foreign assets (2-3): -5.4, -0.4, 1.2, 0.6, 3.5, 4.2, 1.5, 4.1, 4.1, 4.1, 3.6
  - External debt-to-exports ratio (percent): 169.8, 157.6, 173.4, 176.6, 166.6, 162.3, 150.2, 142.1, 134.5, 127.8, 118.2
  - Gross external financing need (millions of U.S. dollars): 1,572.8, 1,080.5, 709.3, 1,007.2, 729.5, 878.2, 400.3, 785.6, 216.2, 790.3, 26.4 (table shows a sequence across years)
- Key macro assumptions (Active)
  - Real GDP growth (percent): historical averages and projected values summarized (e.g., 4.3 projected)
  - GDP deflator in U.S. dollars (change in percent): 0.8, -1.3, 1.0, 1.7, 0.5, 1.0, 1.3, 1.2, 1.8, 2.4, 1.9, 1.7, 1.7, 1.8
  - Nominal external interest rate (percent): 6.1, 6.6, 7.4, 7.2, 7.5, 5.8, 1.8, 8.2, 7.9, 8.4, 8.2, 8.1, 8.1, 8.2
  - Growth of exports (U.S. dollar terms, percent): historical and projected series (e.g., 8.6, 7.1, 8.6, 7.3, etc.)
- Stress tests and alternative scenarios (Active)
  - Debt-stabilizing non-interest current account: -2.5 (table shows -2.5)
  - A1. Key variables at historical averages in 2005-09 produce external debt path changes (table entries shown)
  - B1–B5 show impacts of shocks to nominal interest rate, real GDP growth, dollar deflator, non-interest current account, and combinations.
- Low-case scenario (Table 7) key points
  - External debt: 48.6, 48.2, 53.0, 51.7, 50.6, 52.6, 49.5, 50.3, 52.1, 54.8, 58.2
  - Change in external debt: -0.3, -0.4, 4.8, -1.3, -1.2, 2.1, -3.1, 0.8, 1.8, 2.8, 3.4
  - Identified external debt-creating flows: 5.1, 0.1, 3.6, -1.9, -4.6, -2.2, -4.6, -4.9, -4.4, -3.6, -3.1
  - Current account deficit, excluding interest payments: 7.3, 2.8, -2.0, -3.2, -0.3, -1.9, -2.4, -2.6, -2.1, -1.5, -0.9
  - Net nondebt creating capital inflows: -2.8, -5.2, 2.9, -0.4, -5.7, -0.7, -3.4, -3.3, -3.0, -2.8, -2.6
  - Automatic debt dynamics: 0.6, 2.5, 2.7, 1.6, 1.3, 0.4, 1.1, 1.0, 0.8, 0.8, 0.4
  - Residual, incl. change in gross foreign assets (2-3): -5.4, -0.4, 1.2, 0.6, 3.5, 4.2, 1.5, 5.6, 6.2, 6.3, 6.5
  - External debt-to-exports ratio (percent): 169.8, 157.6, 173.4, 176.6, 166.6, 162.3, 150.2, 149.8, 153.7, 161.3, 170.4
  - Gross external financing need (millions of U.S. dollars): 1,572.8, 1,080.5, 709.3, 1,007.2, 729.6, 878.2, 400.3, 831.8, 358.5, 1,054.1, 444.5
- Stress tests and alternative scenarios (Low-case)
  - Debt-stabilizing non-interest current account: -2.2 (table shows -2.2)
  - A1 and B1–B5 display alternative paths under historical averages and adverse shocks; these show larger increases in external debt ratios under stress relative to the active scenario.

### Additional Note
- Statement by the IMF Staff Representative: March 23, 2005 — contains information that became available since the staff report issued on March 9, 2005; the information does not change the thrust of the staff appraisal.

*Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.*

### 1.      Real GDP grew 6.2 percent in 2004, according to preliminary data, slightly above the

### _cr0607 - 1.      Real GDP grew 6.2 percent in 2004, according to preliminary data, slightly above the

### Macroeconomic performance (2004)
- Real GDP grew 6.2 percent in 2004, according to preliminary data (staff report estimate: 6 percent).
- Consumer price inflation during 2004 was 1.5 percent (staff estimate: 2 percent).
- Unemployment rate for 2004 (based on household survey data for August) was 11.8 percent, down from 13.5 percent in 2002.
- For the second consecutive year, real GDP growth was strong; real GDP grew about 6 percent in 2004 led by a boom in construction and by export-oriented services (in particular the Colon Free Zone and ports).
- Despite high oil prices in 2004, inflation remained low.

### Public finances and fiscal developments
- The deficit of the nonfinancial public sector in 2004 was in line with the staff report estimate: 5 percent of GDP (excluding the Panama Canal Authority).
- Expenditure on a cash basis was about 0.4 percentage point of GDP higher than estimated, reflecting substantial progress in reducing the outstanding stock of payables near the end of 2004.
- Revenue exceeded the staff’s estimate by 0.4 percentage point of GDP, owing to increased transfers from the Canal Authority to the central government of canal fees and dividends.
- The nonfinancial public sector deficit, including the Canal Authority, was 4 percent of GDP.
- The new administration took revenue and expenditure measures starting in September 2004 to contain the deficit.
- The 2005 budget envisages a fiscal deficit of 3.8 percent of GDP, with stiff controls on current public expenditures and protection of key social sector outlays.
- The public debt level increased to US$9.98 billion at end-December 2004.
- Authorities adopted immediate expenditure restraint of US$225.8 million and developed a plan to gradually reduce unpaid arrears with suppliers.
- A fiscal reform yielding a 1 percent of GDP has been approved; revenues to GDP ratio expected to increase to 15.4 percent from the present 14.6 percent level.
- Public payroll is to be scaled down by early 2008 to a range of about 165-170 thousand from the existing over 180 thousand, with exceptions in health, education and security services.

### External sector and balance of payments
- Staff is reviewing coherence of preliminary data on the 2004 balance of payments, which suggests the current account may have substantially exceeded the level estimated in the staff report.
- Preliminary data indicate the Colon Free Zone registered a large drop in net exports in 2004 despite rapid growth of income.
- In one statement, the external current account deficit at end-2004 is reported as 8 percent of GDP compared to a 4 percent deficit at end-2003, almost totally covered by foreign direct investments that reached 7.3 percent of GDP.
- Exports grew at a faster rate than imports; revenues of the Panama Canal Authority (ACP) increased 15.8 percent in FY2004, breaking the one billion dollar level.

### Financial sector and banking system
- The banking system experienced a second year of recovery after the 2002 turmoil; domestic deposits rose by 9 percent and nonresident deposits remained stable in 2004.
- Domestic credit to the private sector grew 9 percent in 2004 because of rapid growth of credit in commerce and mortgages.
- Banking system assets at US$33.2 billion, a 4.5 percent increase compared to 2003.
- Liquid assets to deposit ratio was 42 percent last September.
- Capital adequacy ratio stood at 18.6 percent (regulatory required CAR: 8 percent).
- Return on capital for the banking system was 16.2 percent; return on assets was 2.3 percent.
- Nonperforming loans declined to 1.8 percent from 2.7 percent in 2003; elsewhere nonperforming loans ratios averaged 2 percent and capital adequacy ratios were 19 percent at end-September 2004.
- The Superintendency of Banks (SoB) enhanced consolidated and cross-border supervision and is moving toward Basel II risk requirements to be in place by 2008.
- An MFD mission is scheduled to complete a Model 2 OFC review, covering AML/FT, insurance sector legislation, and domestic stock market framework.

### Growth outlook and sectoral drivers (2005 prospects)
- In 2005, GDP growth is likely to slow; construction sector activity will decelerate though remain high because tax incentives were extended until end-2005.
- Contribution to growth from the external sector is likely to be smaller than in 2004.
- Inflation is expected to remain low.
- Prospects for 2005 are described as favorable, with GDP growth expected to remain well above the last decade’s average.

### Structural reforms and governance
- Torrijos administration announced an overall fiscal reform package on January 12, 2005; by February 2, legislature approved Law no. 6.
- Key measures of the fiscal law:
  - Calls for fiscal discipline and increased revenues from the private sector.
  - Scales down public payroll to about 165-170 thousand by early 2008 (from over 180 thousand).
  - Imposes ceilings on current expenditures and professional service contracts.
  - Reduces by 60 percent the number of vacancies within the next three years.
  - Increases operating fees, eliminates the industrial incentive law of 2004, and causes exports incentives certificates (CAT’s) to expire at end-2005.
  - Limits tax breaks on donations and taxes a share of Panamanians’ foreign income.
  - Widens income tax base to include representation expenses and envisages an anticipated withholding tax of 10 percent.
  - Implementation timing: representation expenses measure took place in February 2005; Free Zone new operating fees to take effect in June 2005; other tax measures in January 2006.
- Social security reform consultations started in mid-2001; an information campaign about the precarious fiscal situation of the SS system was launched in mid-February (year implied 2005).
- Social security reform options may entail changes in contributions, retirement age, services coverage, and replacement payments.

### Executive Board views and policy recommendations
- Executive Directors welcomed strong growth and low inflation, and encouraged development of a well-targeted program for rural poverty reduction and achievement of the Millennium Development Goals.
- Directors emphasized that fiscal deficit reduction and related improvement in public debt dynamics are key to sustaining growth and lowering poverty.
- Directors commended fiscal discipline and transparency efforts, supported reductions in current expenditure and tax reforms, and encouraged using stronger-than-budgeted revenues to reduce unpaid bills to domestic suppliers.
- Directors recommended revising the fiscal responsibility law to incorporate procedural as well as numeric rules; presentation of fiscal accounts both excluding and including the Panama Canal Authority is appropriate.
- Directors encouraged strengthening governance in the National Bank of Panama and the Savings Bank; business plans should be based on sound commercial banking practices and ensure National Bank’s credit to government remains short-term.
- Directors noted expansion of regional banking heightens need for effective supervision and supported SoB efforts to enhance regional coordination.
- Directors supported authorities’ strategy to strengthen competitiveness and productivity by streamlining business procedures, enhancing human capital through sustained investment in education, and increasing labor market flexibility.
- Directors welcomed emphasis on good governance and encouraged an integrated approach to address governance, including civil service and government procurement.
- On the Panama Canal expansion project, Directors noted potential benefits if approved and well-managed but emphasized minimizing fiscal risks and ensuring the Canal Authority is run on a commercial basis.
- Directors encouraged improving quality, timeliness and coverage of economic data; welcomed interest in a data ROSC and a follow-up to the Offshore Financial Center assessment.

*Source: IMF Public Information Notice (PIN) and supporting staff statements contained in the supplied content.*

### 11. Other important structural reforms aimed at improving Panama’s competitive

### 11. Other important structural reforms aimed at improving Panama’s competitive

### Structural reform priorities
- Judicial reform, deregulation, governmental restructuring, attracting foreign investments, and promoting exports are in initial stages as part of Panama’s competitive strategy.
- The new administration emphasizes enhancing growth potential, improving government finances, and strengthening transparency and accountability.
- A zero-tolerance policy on the fight against corruption has been declared.
  - An Anti-Corruption Council was established.
  - Audits of specific government institutions are underway to investigate corruption allegations.
  - The UN Convention Against Corruption has been sent to the Legislature for approval.
- The President announced the reactivation of the “Compete Panama” program, in partnership with the IDB, to reduce red tape for establishing new businesses and thereby enhance business creation, investments, and employment generation.
- Authorities state strong determination to improve social conditions for the poor and most vulnerable groups, supported by the strong political mandate of the May 2004 elections.

### Free trade agreements and market access
- Free trade agreements are a top priority on the 2005 agenda.
  - Panama is negotiating trade agreements with Costa Rica, Mexico, Nicaragua, Singapore, and the United States.
  - Panama has interest in joining the G-3 Group integrated by Mexico, Venezuela, and Colombia.
- Panama joined Ecuador, Honduras, Guatemala, Costa Rica, Colombia, and Nicaragua to oppose the EU proposed “tariff only” for banana imports to be in effect in January 2006.
  - EU has proposed a US$300 dollar tariff per ton --from the present US$75 per ton-- when the 2.6 million-ton quota system expires.
  - Panama exports 80 percent of its production to the EU and competes with duty-free banana from the Africa, Caribbean, and Pacific group (ACP).
- Free trade agreement negotiations with the United States began in April 2004 and have had eight rounds of talks.
  - Remaining areas for a ninth and conclusive round include agricultural products, access to the Panama Canal procurements, and textiles; most non-agricultural issues have been settled.
  - The US FTA is expected to broaden attraction of US investments and strengthen medium-term growth potential.

### Investment activity—Panama Canal reverted areas and ports
- Panama Canal reverted areas continue to attract large foreign and local investments.
  - Second bridge over the Panama Canal: US$200 million public investment; access routes near final conclusion.
  - ACP implemented an investment and maintenance program of nearly US$170 million in 2004.
  - Private investments surged at over US$300 million, primarily in maritime sector, tourism, commercial services, and infrastructure.
  - Panama Ports Company (PPC-Hutchison Wampoa) concluded in 2004 a port expansion at a cost of over US$200 million to service Panamax ships.
  - Evergreen and Manzanillo International Terminal (MIT) have upgraded port facilities.
- PPC-Hutchinson Wampoa and MIT plan to invest US$500 million in 2005 for expanding Atlantic-side port facilities.
  - MIT has already invested US$300 million in its port facilities.
  - PPC-Hutchinson Wampoa has a total investment to date of US$340 million in the Balboa Port located in the Pacific side of the Canal.

### Investment activity—other infrastructure, energy, and tourism
- Other investments outside Canal reverted areas:
  - New shopping mall and hotel in Panama City costing US$100 million are now in service.
  - Expansion of Tocumen international airport began at end-2004.
  - Bayano hydroelectric plant increased capacity by 20 percent after a US$40 million investment.
  - La Fortuna hydroelectric is starting a US$ $225 million expansion program to increase capacity to 150 megawatts.
- At end-2004, total electricity production stood at slightly over 5,000 megawatts, with 58 percent produced by hydroelectric plants.

### Mega projects under consideration and regional energy links
- Major contemplated projects that could substantially increase growth potential:
  - Construction of new sets of locks in the Panama Canal: an approximate investment of over US$4.5 billion.
    - In 2004, the Canal serviced 14,035 ship-crossings, a 6.7 percent increase compared to 2003, with a large portion accounted for by super ships, including Panamax ships.
    - At the present rate of growth in cargo and ship-crossings, canal capacity may be reached by 2012.
    - A referendum is expected to take place late this year to authorize the expansion; estimated construction time is eight years.
    - Main users of the canal today are the U.S., China, Japan, Taiwan, and Chile.
  - Construction of a gas pipeline and an electricity inter-connection between Panama and Colombia:
    - A Memorandum of Understanding was signed in November 2004.
    - The gas pipeline project has an estimated cost of US$200 million and could be in operation in 24 months.
    - The Colombian electricity 300 megawatts interconnection has two alternate routes of 571 km and 514 km costing US$169 million and US$139 million respectively.
    - Venezuela is pursuing an agreement with Panama to interconnect a gas pipeline to the Colombia-Panama project given market demands from China and the U.S. West Coast.
  - Venezuela is considering transporting oil in the trans-Panama oil pipeline (Petroterminales) built in 1982, which now operates below its pumping capacity of 860,000 bbl per day; gas and oil pipeline talks began in early January 2005.
  - Construction of a Pacific coast port with an investment of US$600 million; interested maritime enterprises include Evergreen, Port of Singapore Authority (PSA), China Ocean Shipping Co. (COSCO), Maersk Sealand, and P& O.

### Key statistics and investment figures
- Second Panama Canal bridge: US$200 million (public).
- ACP investment and maintenance program (2004): nearly US$170 million.
- Private investments surged at over US$300 million.
- PPC port expansion (2004): over US$200 million.
- Shopping mall and hotel in Panama City: US$100 million.
- Tocumen airport expansion: began end-2004.
- Bayano hydroelectric investment: US$40 million; capacity increase 20 percent.
- La Fortuna expansion program: US$ $225 million to 150 megawatts.
- Total electricity production at end-2004: slightly over 5,000 megawatts; 58 percent hydroelectric.
- Panama Canal new locks: approximate investment of over US$4.5 billion.
- Canal ship-crossings in 2004: 14,035 (6.7 percent increase vs. 2003); capacity may be reached by 2012.
- Gas pipeline estimated cost: US$200 million; potential operation in 24 months.
- Colombian electricity interconnection: 300 megawatts; routes 571 km and 514 km costing US$169 million and US$139 million.
- Petroterminales pumping capacity: 860,000 bbl per day.
- Pacific coast port investment under consideration: US$600 million.
- PPC-Hutchinson Wampoa and MIT planned investment in 2005: US$500 million.
  - MIT invested to date: US$300 million.
  - PPC invested to date in Balboa Port: US$340 million.

*IMF staff report content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0607.pdf_