## PANAMA: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION

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### Growth outlook and inflation
- Real GDP growth:
  - 2015: 5.8 percent.
  - 2016 (proj): around 6 percent; MEF projects 6.3 percent in 2016.
  - Medium term: around 6 percent; staff notes medium-term growth expected to remain in the 6–7 percent range and projects 2017: 6.4 percent.
- Growth drivers and risks:
  - Support from expected opening of the expanded canal (expected operational in June 2016), lower fuel prices, dynamic service sector, and investments in energy, mining, logistics.
  - Risks from slowing global growth and U.S. dollar appreciation potentially dampening canal revenues and capital inflows.
- Inflation (consumer price index):
  - Average: 2015: 0.1 percent; 2016 (proj): 0.8 percent; 2017 (proj): 2.0 percent.
  - End-of-year: 2015: 0.3 percent; 2016 (proj): 0.8 percent; 2017 (proj): 2.0 percent.
- Labor and costs:
  - Unemployment: rose to 5.1 percent in 2015 (total unemployment August, 2015: 5.1).
  - Minimum wage: increased by 8.5 percent in 2016 compared with 2014.
  - Real unit labor costs: declined over the past several years.

### Fiscal position, public debt, and fiscal framework
- Fiscal balances and debt:
  - NFPS overall deficit: 2015: 2.8 percent of GDP (annual overall deficit of NFPS was 2.8 percent of GDP in 2015, below budget of 3.7 percent of GDP).
  - Staff projection: consolidate to 1.2 percent of GDP over the medium term.
  - Adjusted deficit: estimated at below 2 percent of GDP, in compliance with the Social Fiscal Responsibility Law (SFRL).
  - NFPS debt: 2015: 39 percent of GDP; projected to fall below 35 percent of GDP over the medium term (table projections show public debt of NFPS: 2015: 38.8; 2016 (proj): 39.4; 2017 (proj): 38.4).
- Public sector aggregates (percent of GDP):
  - Revenue and grants: 2015: 23.6 percent; 2016 (proj): 23.4 percent; 2017 (proj): 23.1 percent.
  - Expenditure: 2015: 27.7 percent; 2016 (proj): 26.9 percent; 2017 (proj): 24.8 percent.
  - Current, including interest: 2015: 18.1 percent; 2016 (proj): 18.5 percent; 2017 (proj): 18.3 percent.
  - Capital: 2015: 9.6 percent; 2016 (proj): 8.3 percent; 2017 (proj): 6.4 percent.
  - Overall balance: 2014: -4.1 percent; 2015: -4.1 percent; 2016 (proj): -3.5 percent; 2017 (proj): -1.7 percent.
  - Overall balance, excluding ACP: 2015: -2.8 percent; 2016 (proj): -3.1 percent; 2017 (proj): -2.1 percent.
- Canal contributions and FAP:
  - From 2015, canal contributions above 3.5 percent of GDP are saved in the FAP; shortfalls below 3.5 percent of GDP allow overall fiscal deficit to expand by that shortfall.
  - Canal contributions now projected about 2.5–3 percent of GDP in the medium term (revised down from about 4 percent), implying the overall fiscal deficit about 1 percent of GDP higher per year than implied by the adjusted balance.
  - Medium-term consolidation: about 2 percentage points of GDP in five years; resources unlikely to be transferred to the FAP in the foreseeable future.
- Fiscal framework shortcomings and institutional measures:
  - SFRL issues: net debt below 40 percent of GDP is only “indicative”; repeated waivers and amendments; lack of sanctions and automatic correction mechanisms; deficit ceiling can increase by shortfalls in canal contribution based on an assumed long-run average of 3.5 percent of GDP.
  - Authorities committed to abide by deficit ceilings without additional waivers, implement a top-down budgetary process, publish SOE liabilities, consider an independent fiscal council, and consider multi-year budgeting.
- Revenue administration:
  - Revenue-to-GDP ratio: 2014: 9.6 percent (compared with CAPDR average 13.9 and South America 20.3).
  - VAT evasion estimated at about 40 percent.
  - Measures: partial VAT withholding by 160 largest companies (Feb 2016) estimated to collect US$100–200 million (0.2–0.4 percent of GDP); call center to notify taxpayers; plan for eTax II; no plan to review numerous tax exemptions.
- Pension system pressures:
  - Defined benefit subsystem starts to incur cash losses in 2015; reserves depleted in 2027 absent parametric reform.
  - Between 2027 and 2060 expenditure of the defined benefit subsystem would impose fiscal pressure of 1–2 percentage points of GDP.
  - Suggested reforms: parametric measures (increase retirement age, reduce replacement rate); consider combining reserves for consolidated asset-liability management.
  - Dependency ratio: current about 16 percent; projected 36 percent in 2060.

### External sector and financing
- Current account and saving/investment:
  - Current account deficit: 2015: -6.5 percent of GDP; expected to decline to about -3 percent of GDP in the medium term (staff note: 2016 (proj): -6.2; 2017 (proj): -5.0).
  - Gross domestic investment: 2015: 47.5 percent of GDP; 2016 (proj): 46.0 percent; 2017 (proj): 44.0 percent.
  - Gross national saving: 2015: 41.0 percent of GDP; 2016 (proj): 39.8 percent; 2017 (proj): 39.0 percent.
  - Foreign direct investment: 2015: 8.7 percent of GDP; 2016 (proj): 8.8 percent; 2017 (proj): 8.7 percent.
  - GDP (US$ millions, current price): 2015: 52,132; 2016 (proj): 55,755; 2017 (proj): 60,510.
- External debt, NIIP and reserves:
  - NFPS external debt: 2015: 30.0 percent of GDP; 2016 (proj): 30.1 percent; 2017 (proj): 27.2 percent.
  - NIIP (percent of GDP): 2015: -78.0; 2016 (proj): -79.1; 2017 (proj): -77.8.
  - Gross international reserves of National Bank of Panama (US$ millions): 2015: 3,713; 2016 (proj): 3,972; 2017 (proj): 4,311.
- External financing and FDI:
  - Strong and stable FDI expected to continue financing the bulk of external deficits; FDI record US$4.5 billion in 2015 (~9 percent of GDP).
- Risks:
  - Weak global growth could lower canal receipts and capital inflows.
  - Tighter/volatile global financial conditions and de-risking could restrict correspondent banking services and access to international finance.
  - Panama’s strong banking fundamentals and fiscal room help mitigate shocks.

### AML/CFT, tax transparency, and reputational issues
- FATF engagement and legal reforms:
  - FATF included Panama on gray list June 2014; an action plan agreed; FATF removed Panama from gray list on February 18, 2016 after legislative reforms and implementation steps.
  - Panama scheduled for assessment against the 2012 FATF standard in mid-2017 with emphasis on effective implementation, beneficial ownership, control, and adding tax crimes as predicate offenses to money laundering.
- Mossack Fonseca leak and OFAC actions:
  - Leak: April 2016 — about 11.5 million documents covering 1977–2015; over 214,000 offshore companies in that period.
  - OFAC U.S. sanctions (May 2016) targeted the Waked Money Laundering Organization, two Panamanian citizens, six Panamanian-based associates, and 68 companies.
  - Supervisory/law-enforcement responses: SBP took operating control of a local bank, opened criminal investigations, took control of a local brokerage house, and initiated extraordinary inspections of nonfinancial entities.
  - Government created an independent commission of international experts to evaluate practices and proposed measures to strengthen transparency; committed to bilateral Automatic Exchange of Information (AEOI) following OECD’s CRS by 2018.
- Legal and supervisory reforms (Key measures from 2015 reforms):
  - Extended CDD and STR obligations to nonfinancial entities; Law 23 (2015) established an intendancy for supervision of nonfinancial entities.
  - Beneficial ownership identification strengthened; mandatory identification of all parties to a trust client; bearer shares restricted to custodian or replacement by registered share certificates; resident agents obliged to gather and maintain beneficial ownership information.
  - Criminalized missing predicate offenses to ML under previous FATF standard.
  - Strengthened FIU: enhanced resources, central STR receipt, feedback to reporting entities.
  - International cooperation improvements: legal provisions for cooperation absent treaty; MoUs with foreign FIUs.
  - Implementation support: training and capacity development since second half 2015.
- Outstanding vulnerabilities and reputational effects:
  - Mossack Fonseca documents highlight implementation deficiencies by lawyers and lack of transparency in legal persons/arrangements.
  - Reputational impacts: increased due diligence costs for correspondent banks, unpredictable risks for customer relationships and external funding, higher scrutiny of Panamanian entities internationally.
- Executive Board / Directors’ advice:
  - Emphasize strengthening AML/CFT framework to international standards and effective implementation.
  - Improve financial integrity and transparency ahead of next FATF assessment; expand automatic exchange of tax information agreements.
  - Mitigate de-risking impacts through greater international efforts.

### Financial sector resilience and supervision
- Banking system health:
  - Banking assets: US$98.5 billion in 2015 (up 9.5 percent vs 2014).
  - CAR: 15.2 percent in 2015 (statutory requirement 8 percent).
  - ROA: 1.4 percent in 2015; ROE: 13.4 percent in 2015.
  - Private sector credit growth: 2015: 11.6 percent; (Table projections: 2016 (proj): 2.8; 2017 (proj): 7.1).
  - NPL ratio (end-period): 2015: 1.1 percent (banking system: 2015 listed as 1.1 in table; elsewhere 2015 NPL: 1.3 percent noted).
- Liquidity and safety net:
  - No lender of last resort or deposit insurance.
  - Official liquidity: around 60 percent of deposits (twice required 30 percent), but regulatory definitions inflate liquidity ratio; liquid assets to total assets relatively low compared with peers.
  - Supervisory data and liquidity regulation not in line with Basel III; inclusion of assets receivable within 186 days and certain below-investment-grade assets weakens standard.
  - Staff urged harmonizing liquidity regulation with Basel III, more stringent definition of liquid assets, broader interpretation of short-term liabilities, and more granular balance-sheet data collection.
- Supervision and FSAP recommendations:
  - Continue implementation of 2011 FSAP recommendations: enhance cross-border supervision, systemic risk monitoring, and strengthen supervision of nonbank financial institutions.
  - Establish temporary liquidity facility for banks as an immediate priority; develop contingency plans for systemic shocks and for loss of correspondent banking relations.
- Correspondent banking and de-risking:
  - Total correspondent relationships stable at 463–464 between March 2015 and end-February 2016: 62 lost, 63 new established.
  - Loss of correspondent services could restrict access to global capital, cross-border payments, and trade finance; monitoring and international engagement recommended.

### Structural reforms and inclusive growth
- Human capital and social policy:
  - Panama lags peers on student achievement, enrollment and education spending; education reform priorities: higher investment in infrastructure, school renovation, extended school day, upgraded teacher training curricula, vocational and foreign language programs.
  - Social assistance: significant poverty reduction overall, but indigenous and socially-vulnerable groups need targeted support.
- Investment and sectoral notes:
  - Major projects: Minera Panama US$6.0 billion (about 40 percent complete; copper exports expected in 2018); AES gas-project US$1.0 billion (start 2018); Chan II hydro-project US$1.0 billion (start 2019); infrastructure projects including metro lines, bridges, Tocumen expansion.
  - CFZ (Colón Free Zone) exposure: accounts for 60 percent of merchandise trade, 6 percent of workforce in nonfinancial companies, and 20 percent of banking system’s commercial loan exposure; credit to commerce fell -30 percent y-o-y in 2015 largely due to CFZ difficulties.
  - Banks increased provisions against CFZ exposures; mortgage and consumer loans maintained strong growth.
- Price controls and data:
  - Authorities introduced price controls on varieties of 22 basic food products in July 2014 and repeatedly extended them; staff recommended discontinuation to avoid distortions.
  - Data improvements: rebased national accounts to 2007 published for 2007–2015 (production approach); gaps remain (timeliness, consistency, financial sector data such as housing prices and corporate leverage); planned real estate price index mid-2016.

### Executive Board assessment and key policy priorities
- Directors commended dynamic macro performance: high growth, low inflation and unemployment, declining current account deficit.
- Key policy recommendations from Directors and staff:
  - Enhance financial transparency; strengthen AML/CFT framework and its implementation.
  - Strengthen fiscal framework, build larger buffers, and promote inclusive growth.
  - Institutional fiscal governance: multi-year budgeting, independent fiscal council, limits on current expenditure growth to safeguard capital spending.
  - Pension reform to address large unfunded liabilities and preserve fiscal space.
  - Align supervision with Basel standards, enhance liquidity buffers, and establish a financial safety net (temporary liquidity facility).
  - Invest in education and vocational training to raise labor productivity.
  - Rapidly expand bilateral AEOI agreements and implement OECD CRS by 2018.

### Risk Assessment Matrix (selected external and domestic risks)
- External risks:
  - Tighter/volatile global financial conditions (Likelihood/Severity: MM): reduction in capital inflows, higher spreads; policy response: adjust deficit financing, avoid sharp domestic rate increases, fiscal adjustment, current account adjustment via lower imports.
  - Sharper global growth slowdown (L/MM to MH): lower canal receipts and exports; policy response: structural reforms to raise productivity and competitiveness.
  - De-risking (MH): reduced access to international finance; policy response: intensify monitoring, improve transparency, financial sector consolidation.
  - Persistently lower energy prices (HL): beneficial as an oil importer; policy response: reduce energy subsidies, facilitate energy investment.
- Domestic risks:
  - Fallout from Mossack Fonseca, delays in AML/CFT or AEOI (MH): reputational damage, reduced external funding; policy response: enhance transparency, include tax crimes as predicate offense, expand AEOI agreements.
  - Relaxation of fiscal policy/deficit ceilings (LHL): larger borrowing and fiscal vulnerability; policy response: build buffers, commit to targets below SFRL ceilings.
  - Climate-related water shortages for canal (MM): disruption of canal transit; policy response: strengthen water management and invest in alternative sources.
  - Disruption to canal expansion (LL): negative short-term growth and employment effects; policy response: improve public investment efficiency and review fiscal framework.

### Debt Sustainability Analysis — baseline and stress tests (selected)
- Public sector gross debt (percent of GDP) baseline:
  - 2014: 44.7; 2015: 37.1; 2016: 38.8; 2017: 39.6; 2018: 38.8; 2019: 37.2; 2020: 35.8; 2021: 34.3; [projection continuing] 32.9.
- Public gross financing needs (percent of GDP):
  - 2014: 3.2; 2015: 3.4; 2016: 4.0; 2017: 5.3; 2018: 7.0; 2019: 9.0; 2020: 10.5; 2021: 13.5; [projection continuing] 15.9.
- Baseline growth and inflation assumptions (selected):
  - Real GDP growth series (2014–projection): 2014: 7.9; 2015: 6.1; 2016: 5.8; 2017: 6.1; 2018: 6.4; 2019: 6.7; 2020: 6.3; 2021: 6.0; [projection] 6.0.
  - Inflation (GDP deflator) series: 2014: 4.7; 2015: 3.4; 2016: 0.2; 2017: 0.8; 2018–2021: 2.0 each year.
  - Effective interest rate (percent) series: 2014: 6.6; 2015: 5.3; 2016: 5.1; 2017: 4.9; 2018: 4.8; 2019: 4.7; 2020: 4.8; 2021: 4.4; [projection] 4.8.
- Stress test outcomes (selected):
  - Financial contingent liability shock: public debt increases to 54 percent of GDP in 2017–18 under the scenario but remains on a declining path thereafter.
  - Combined medium-term output and financial condition shock (GDP growth to 4 percent; financing costs +400 bpts): impact on public debt limited.
- External DSA highlights:
  - Baseline external debt (percent of GDP): 2015: 104.9; 2016: 102.7; 2017: 96.9; 2018: 91.5; 2019: 86.7; 2020: 81.1; 2021: 77.3.
  - Debt-stabilizing non-interest current account: -8.2 percent of GDP.
  - Gross external financing needs (US$ billions): 2015: 16.0; 2016: 16.6; 2017: 16.4; 2018: 16.8; 2019: 17.7; 2020: 20.1; 2021: 21.5.

### Selected macroeconomic and social indicators (highlights)
- Population (millions, 2013): 3.9.
- Poverty line (percent, 2013): 25.8.
- Population growth rate (percent, 2013): 1.7.
- Adult literacy rate (percent, 2010): 94.0.
- Life expectancy at birth (years, 2012): 77.0.
- GDP per capita (USD, 2013): 11,649.
- IMF Quota (SDR, million): 206.6.
- Real GDP historical and projections (percent change): 2012: 9.2; 2013: 6.6; 2014: 6.1; 2015: 5.8; 2016 (proj): 6.1; 2017 (proj): 6.4.
- Consumer price index (average): 2012: 5.7; 2013: 4.0; 2014: 2.6; 2015: 0.1; 2016 (proj): 0.8; 2017 (proj): 2.0.
- NFPS overall balance, excluding ACP (percent of GDP): 2012: -1.5; 2013: -2.3; 2014: -3.2; 2015: -2.8; 2016 (proj): -3.1; 2017 (proj): -2.1.
- Public debt of NFPS (percent of GDP): 2012: 35.7; 2013: 35.0; 2014: 37.1; 2015: 38.8; 2016 (proj): 39.4; 2017 (proj): 38.4.
- Current account balance (percent of GDP): 2012: -10.5; 2013: -9.8; 2014: -9.8; 2015: -6.5; 2016 (proj): -6.2; 2017 (proj): -5.0.
- Foreign direct investment (percent of GDP): 2012–2017: 8.7, 8.1, 8.1, 8.7, 8.8, 8.7.

### Policy recommendations and priorities (condensed)
- Strengthen and enforce AML/CFT framework and financial integrity; ensure effective implementation ahead of mid-2017 FATF assessment; include tax crimes as predicate offences; expand AEOI agreements and implement CRS by 2018.
- Strengthen fiscal framework: commit to deficit ceilings, introduce multi-year budgeting, consider an independent fiscal council, limit current expenditure growth, publish consolidated public sector assets/liabilities and contingent liabilities.
- Pursue parametric pension reform to avert 1–2 percent of GDP annual fiscal pressure post-2027; consider consolidating pension reserves.
- Modernize revenue administration: broaden tax base, develop tax compliance strategy, refrain from tax amnesties, complete eTax II, and sustain VAT withholding and collection measures.
- Align liquidity regulation with Basel III, establish a temporary liquidity facility for banks, develop contingency plans for loss of correspondent banking relations, and strengthen supervision of nonbank financial institutions.
- Continue investment in education, vocational training, and human capital improvements to address skills shortages and promote inclusive growth.
- Improve water management and invest in alternative water sources to secure canal operations; enhance efficiency of public investment.

*Source: PANAMA STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF staff report, May 5, 2016).*

### 5.8 percent in 2015, and growth is projected to remain around 6 percent in 2016 and over the

### PANAMA: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION

### Growth outlook and inflation
- Real GDP growth was 5.8 percent in 2015, and growth is projected to remain around 6 percent in 2016 and over the medium term.
- The economy will be supported by the expected opening of the expanded canal and lower fuel prices, which will counterbalance the effects of slowing global growth and U.S. dollar appreciation.
- Over the medium term, the increase in canal transit, a dynamic service sector, and investments in the energy, mining, and logistics sectors should help maintain vibrant growth.
- Inflation:
  - Consumer price index (average): 0.1 percent in 2015; projected 0.8 percent in 2016 and 2.0 percent in 2017.
  - Consumer price index (end-of-year): 0.3 percent in 2015; projected 0.8 percent in 2016 and 2.0 percent in 2017.
- Other sectoral and labor notes:
  - Unemployment rose to 5.1 percent but remains below the average of the past decade.
  - The minimum wage increased by 8.5 percent in 2016 compared with 2014.
  - Real unit labor costs have declined over the past several years.

### Fiscal position, public debt, and fiscal framework
- Fiscal balances and debt:
  - The overall fiscal deficit fell to 2.8 percent of GDP in 2015 and is expected to consolidate to 1.2 percent of GDP over the medium term.
  - Debt of the Non-Financial Public Sector was 39 percent of GDP in 2015 and is projected to fall below 35 percent of GDP over the medium term.
  - The annual overall deficit of the Non-Financial Public Sector (NFPS) was 2.8 percent of GDP in 2015, below the budget of 3.7 percent of GDP.
  - The adjusted deficit is estimated at below 2 percent of GDP, in compliance with the Social Fiscal Responsibility Law (SFRL).
- Public sector aggregates (percent of GDP):
  - Revenue and grants: 23.6 percent in 2015; projected 23.4 percent in 2016 and 23.1 percent in 2017.
  - Expenditure: 27.7 percent in 2015; projected 26.9 percent in 2016 and 24.8 percent in 2017.
  - Current, including interest: 18.1 percent in 2015; projected 18.5 percent in 2016 and 18.3 percent in 2017.
  - Capital: 9.6 percent in 2015; projected 8.3 percent in 2016 and 6.4 percent in 2017.
  - Overall balance: -4.1 percent in 2014; -4.1 percent in 2015; projected -3.5 percent in 2016 and -1.7 percent in 2017.
  - Overall balance, excluding ACP: -2.8 percent in 2015; projected -3.1 percent in 2016 and -2.1 percent in 2017.
- Policy recommendations:
  - Continue strengthening the transparency and accountability of the fiscal framework.
  - Introduce mechanisms to enhance incentives for compliance with fiscal rules and promptly detect and correct slippages.
  - Consider multi-year budgeting, establish an independent fiscal council, and safeguard capital spending.
  - Pursue parametric pension reform to ensure financial sustainability given large unfunded future liabilities.
  - Modernize revenue administration, broaden the tax base, develop appropriate incentives for tax compliance, and refrain from tax amnesties.

### External sector and financing
- Current account and financing:
  - The current account deficit declined significantly in 2015 to 6.5 percent of GDP and is expected to fall to 3 percent of GDP in the medium term.
  - Gross domestic investment: 47.5 percent of GDP in 2015; projected 46.0 percent in 2016 and 44.0 percent in 2017.
  - Gross national saving: 41.0 percent of GDP in 2015; projected 39.8 percent in 2016 and 39.0 percent in 2017.
  - Foreign direct investment: 8.7 percent of GDP in 2015; projected 8.8 percent in 2016 and 8.7 percent in 2017.
- Risks:
  - A weakening of global growth could dampen canal revenues and precipitate weaker capital inflows.
  - Tighter and/or more volatile global financial conditions would quickly feed into the local financial system.
  - Strong fundamentals of the banking sector and fiscal room to implement a countercyclical response would help mitigate shocks.
- Memorandum items:
  - GDP (in millions of US$, current price): 52,132 in 2015; projected 55,755 in 2016 and 60,510 in 2017.
  - Non-financial public sector external debt: 30.0 percent of GDP in 2015; projected 30.1 percent in 2016 and 27.2 percent in 2017.

### AML/CFT, tax transparency, and reputational issues
- FATF and AML/CFT:
  - FATF included Panama in the list of countries with strategic deficiencies in AML/CFT in June 2014; authorities implemented an action plan agreed with the FATF.
  - The FATF recognized progress by removing Panama from the list in February 2016.
  - Panama is scheduled to undergo an assessment against the prevailing 2012 FATF standard in mid-2017, focusing on the effective implementation of the AML/CFT regime and strengthened provisions on beneficial ownership and control and the addition of tax crimes as predicate offenses to money laundering.
- Mossack Fonseca leak and subsequent actions:
  - After the leak of documents from the law firm Mossack Fonseca in April 2016, the government announced creation of an independent commission of international experts to evaluate practices of the Panamanian financial center and propose measures to strengthen transparency of the financial and legal systems.
  - The government committed to the bilateral Automatic Exchange of Information related to tax matters, following the OECD’s Common Reporting Standards by 2018.
  - In May 2016, the U.S. imposed sanctions under the U.S. Foreign Narcotics Kingpin Designation Act on the Waked Money Laundering Organization. This prompted Panama’s Superintendent of Banks to take operating control of a local bank designated by U.S. authorities, triggered criminal investigations, took control of a local brokerage house, and initiated extraordinary inspections of nonfinancial entities.
- Executive Board and staff advice:
  - Directors stressed the importance of strengthening the AML/CFT framework in line with international standards and ensuring its effective implementation.
  - Directors called on the authorities to improve financial integrity and transparency ahead of the next FATF assessment and to expand automatic exchange of tax information agreements with other jurisdictions.
  - Measures to mitigate the impact of de-risking were encouraged, though these will require greater international efforts.

### Financial sector resilience and supervision
- Banking and liquidity:
  - Panama’s financial sector is generally healthy, but certain areas require greater vigilance.
  - In the absence of a lender of last resort, authorities should develop contingency plans to address systemic shocks and ensure larger liquidity buffers.
  - Suggested measures include aligning liquidity regulation with the Basel III framework and establishing a temporary liquidity facility for banks.
- Supervision and systemic risk:
  - Directors encouraged full implementation of FSAP recommendations, enhanced cross-border supervision and systemic risk monitoring, and strengthened supervision of nonbank financial institutions.
- Correspondent banking and de-risking:
  - Evolving business models for banks, changes in capital regulations, concerns over compliance with international standards on financial integrity and transparency, and increased due diligence by foreign banks have curtailed some smaller Panamanian banks’ access to correspondent banks.
  - Correspondent banking relationships by global banks have decreased, reducing smaller Panamanian banks’ access to international financial services; a more significant loss of correspondent banking services would have negative implications and needs careful monitoring.

### Structural reforms and inclusive growth
- Human capital and social policy:
  - Human capital enhancements are essential for sustaining high and inclusive growth.
  - Authorities are encouraged to move forward with measures to improve education quality, reduce skills shortages, and strengthen productivity.
  - Significant poverty reduction has occurred over recent years, but social assistance will be essential to address needs of the indigenous and other socially-vulnerable groups to achieve more inclusive growth.
- Investment and credit:
  - Private sector credit grew faster than nominal GDP, though credit to commerce slowed sharply since 2013 (-30 percent y-o-y in 2015) largely due to difficulties in the Colon Free Zone (CFZ).
  - Banks increased provisions against CFZ exposures and intensified scrutiny on loans to CFZ; mortgage and consumer loans maintained strong growth.

### Executive Board assessment and key policy priorities
- Directors commended Panama’s dynamic macroeconomic performance, low inflation and unemployment, and a declining current account deficit.
- Noting downside risks from the external environment, Directors encouraged:
  - Further efforts to enhance financial transparency and strengthen the AML/CFT framework and its implementation.
  - Strengthening the fiscal framework, building larger buffers, and promoting inclusive growth.
  - Introducing fiscal governance reforms such as multi-year budgeting and an independent fiscal council.
  - Pension reform to address large unfunded liabilities and preserve fiscal space.
  - Aligning financial sector supervision with Basel standards, enhancing liquidity buffers, and establishing a financial safety net.
  - Continued investment in education and vocational training to raise labor productivity.

*Source: PANAMA STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF staff report, May 5, 2016).*

### 6.      Formal progress in improving financial

### 6.      Formal progress in improving financial integrity and transparency

### FATF engagement and legislative action
- Panama was put on the FATF “gray list” in June 2014 due to strategic deficiencies identified in the AML/CFT assessment.
- An action plan was agreed between the authorities and the FATF to enhance compliance with the standard.
- The FATF conducted an on-site visit in January and removed Panama from its “gray list” on February 18, 2016 after steps were taken by the authorities to implement items of the action plan, notably in the form of legislative reform.
- Key implementation timeline and events:
  - Leak of Mossack Fonseca documents: April 2016 (11.5 million documents).
  - U.S. sanctions under the U.S. Foreign Narcotics Kingpin Designation Act: May 2016.
  - FATF removal from gray list: February 18, 2016.
  - FATF assessment against the prevailing 2012 standard scheduled: mid-2017.

### Remaining AML/CFT and transparency vulnerabilities
- The “Mossack Fonseca documents” and recent U.S. sanctions point to remaining deficiencies in AML/CFT and transparency frameworks and their implementation.
- U.S. actions in May 2016 targeted:
  - The Waked Money Laundering Organization,
  - Two Panamanian citizens,
  - Six Panamanian-based associates (including two attorneys involved in incorporating shell companies),
  - 68 companies in laundering narcotics and other illicit proceeds.
- Panamanian supervisory and law-enforcement responses:
  - Panama’s Superintendent of Banks (SBP) took operating control of a local bank designated by U.S. authorities.
  - Opening of criminal investigations.
  - Taking control of a local brokerage house.
  - Beginning extraordinary inspections of nonfinancial entities by Panamanian authorities.

### Key measures in the FATF action plan and 2015 legal reforms (Box 1 — Key measures)
- Nonfinancial entities
  - Extended the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions.
  - Introduced suspicious transaction reporting (STR) requirements for all nonfinancial entities.
  - Established an intendancy for supervision and regulation of nonfinancial entities (Law 23 from 2015).
  - Adjusted the legal framework to grant the financial intelligence unit (FIU) access to information maintained by all nonfinancial entities and resident agents.
- Identification of beneficial ownership
  - Amended legal provisions to ensure identification of beneficial owners of all customers (natural and legal) in trust companies and associated services.
  - Introduced mandatory identification of all parties to a trust client and covered them by the CDD obligations.
  - Restricted the existence of bearer shares by creating a legal obligation for all bearer shares to be delivered to a custodian or to be replaced by registered share certificates.
  - Obliged all resident agents to gather and maintain information on beneficial ownership.
- Criminalize ML/TF
  - Included missing predicate offenses to ML under the previous FATF standard: piracy, forgery, forgery of money, smuggling, etc.
  - Extended the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions. (text duplicated in source)
- Freezing of terrorist assets
  - Mechanisms to freeze terrorist assets in accordance with UN guidelines without delay and outside of criminal court context.
  - Adopted procedure to freeze terrorist assets for cases initiated under other jurisdictions.
- Strengthen the FIU
  - Enhanced financial and human resources in line with its expanded responsibilities for new reporting entities.
  - Set the FIU as the central agency that receives STRs; strengthened STR quality by providing feedback to reporting entities and coordination with other supervisors.
- International cooperation
  - Explicit legal provision to regulate the principles and procedures for international legal cooperation in the absence of a treaty.
  - Engaged in signing MoUs with foreign FIUs.
- Implementation support
  - From the second half of 2015, authorities emphasized facilitating implementation by hiring more staff, and providing training and capacity development to staff at competent supervisory institutions.
  - Reporting entities, including nonfinancial institutions, have been receiving training on the format and practice of reporting suspicious transactions.
- FATF decision context
  - FATF removed Panama from the gray list in February 2016 in recognition of Panama’s progress. The decision was based on a targeted review of technical items included in the previous FATF standard, and is not indicative of Panama’s level of compliance with the prevailing FATF standard, adopted in 2012.
  - The “Mossack Fonseca documents” highlight potential deficiencies in implementation by lawyers and a lack of transparency of legal persons and arrangements established in Panama.
  - Panama is scheduled to undergo an assessment against the prevailing 2012 FATF standard in mid-2017, with focus on effective implementation and a greater emphasis on a risk-based approach and the addition of tax crimes as predicate offenses of ML.

### Macro-financial outlook and risks linked to integrity and transparency issues
- Growth and investment
  - Medium-term growth expected to remain in the 6–7 percent range.
  - The canal represents 16 percent of Panama’s diversified services exports (travel, tourism, commercial, and financial services).
  - The expanded canal is expected to become operational in June 2016.
  - Construction of a major copper and gold mine is ongoing with an estimated annual export capacity of about US$2 billion that will start in 2018.
- Public debt and external position
  - NFPS debt-to-GDP ratio: 39 percent in 2015; expected to decline to about 35 percent in the medium term.
  - Current account deficit: expected to decline from 6.5 percent to around 3 percent of GDP in the medium term.
- Correspondent banking relationships and access to global financial services
  - Total number of correspondent bank relationships remained stable at 463-464 between March 2015 and end-February 2016.
  - Of these, 62 relationships were lost, and Panamanian banks established 63 new relationships.
  - A significant loss of correspondent banking services could restrict access to global capital, cross-border payments, and trade finance, with negative implications for the economy and potential contagion across the banking system.
- Reputational and economic impact of Mossack Fonseca leak
  - Leak details and scale:
    - About 11.5 million documents covering 1977–2015.
    - Over 214,000 offshore companies set up in that period.
    - According to ICIJ, more than 75 percent of the companies in Mossack Fonseca’s files were established in other jurisdictions outside Panama, with more than half of the companies incorporated in the British Virgin Islands.
    - Mossack Fonseca worked with more than 14,000 banks, law firms, company incorporators, and other agents.
    - ICIJ analysis suggests more than 500 banks, their subsidiaries and branches registered shell companies for clients with Mossack Fonseca.
  - Direct macroeconomic footprint:
    - Legal services related to incorporations are estimated to represent only around 0.7% of GDP and are associated with a very small cluster of business activities.
  - Reputational effects:
    - Raised unpredictable risks for customer relationships and external funding.
    - Likely to increase due diligence costs of correspondent banks, potentially lowering their exposure to the Panamanian financial system.
    - Panamanian law firms, banks, and companies likely to come under increased scrutiny by foreign governments, regulators, and international bodies.
- Specific domestic risks
  - Canal-related water risks: Canal operations share water source with civilian water supply; droughts related to El Niño have threatened canal operation. The ACP announced draft restrictions starting on April 18, 2016 due to low water levels. Authorities considering investments to develop alternative water sources.
  - Colon Free Zone (CFZ) vulnerabilities:
    - CFZ accounts for 60 percent of Panama’s merchandise trade, 6 percent of the workforce in nonfinancial companies, and 20 percent of the banking system’s commercial loan exposure.
    - Ongoing tariff dispute with Colombia on textiles and footwear imports from CFZ; WTO panel recommended Colombia modify tariffs but no timetable or actions stated.
    - Low commodity prices and regional stagnation, particularly in Venezuela, could further damage CFZ trade activities.
    - Continued deterioration in CFZ collateral values could negatively affect banking sector asset quality.

### Authorities’ responses and follow-up actions
- Criminal and supervisory actions following the Mossack Fonseca leak:
  - Attorney General’s Office opened a criminal investigation into the activities of Mossack Fonseca and stated all treaties and conventions for international cooperation will be used to obtain information from other jurisdictions.
  - The firm has been under investigation since January based on allegations from Brazilian authorities of the firm’s involvement in money laundering.
  - The newly established Intendancy for Supervision and Regulation of Non-Financial Institutions initiated additional audits of law firms to verify compliance with new AML/CFT legislation, particularly strengthened due diligence.
  - Government announced creation of an independent “blue-ribbon” commission of international experts to evaluate practices of the Panamanian financial center and propose measures to strengthen transparency of the financial and legal systems; findings to be shared with other countries.
- Ongoing dialogue:
  - The authorities and local banks are in dialogue with global banks and their home country regulators regarding correspondent banking relationship concerns.

*International Monetary Fund — Panama: selected excerpts from the IMF staff report*

### 16.      The current fiscal stance is appropriate. Staff project the fiscal deficit for 2016 to be

### 16.      The current fiscal stance is appropriate. Staff project the fiscal deficit for 2016 to be

### Fiscal stance and projections
- Staff project the fiscal deficit for 2016 to be 3.1 percent of GDP, consistent with the fiscal rule and with a projected decline of debt-to-GDP of the NFPS in the medium term.
- Given that growth is high and stable and inflation is subdued, there is no compelling reason at this time to deviate from the medium-term fiscal consolidation path for economic stabilization goals.

### Fiscal framework: achievements
- Since the current fiscal framework became effective in 2009, the primary balance and debt-to-GDP ratio of the NFPS on average have improved significantly compared with those in 2000–2008.
- The Social and Fiscal Responsibility Law (SFRL) and the Savings Fund Law established an operating target—deficit ceilings for the NFPS—with the objective of preserving debt sustainability in the medium term.
- The framework provides flexibility to respond to shocks by allowing the fiscal balance to exceed these ceilings during large economic downturns and/or adverse external shocks.

### Fiscal framework: shortcomings
- The objective of maintaining net debt below 40 percent of GDP is merely an “indicative” target that does not provide sufficient guidance for setting deficit ceilings given that current net debt is already below 40 percent of GDP.
- The definition of net debt does not encompass a range of relevant government assets and liabilities.
- Since the SFRL came into force in 2009, deficit ceilings have been repeatedly relaxed through waivers and amendments to the law, signaling a weakness in the accountability framework.
- The SFRL does not provide for any sanctions and lacks automatic mechanisms for detecting and correcting slippages during the budget year to avert deviations by year-end.
- The deficit ceiling target lacks transparency because the deficit target is allowed to increase by the amount that the canal contribution to the budget falls below an assumed long run average (3.5 percent of GDP) that has become unrealistic.
- The combination of deficit ceilings and rapid growth of operating expenses has been putting pressure on capital spending.
- Although the medium-term fiscal plan and the five-year investment plan are publicly available, they are not binding when the budget is formulated.

### Authorities’ reform commitments and institutional measures
- Authorities committed to abide by the deficit ceiling targets without additional waivers.
- Plans include implementing a top-down budgetary process to curb excessive expansion of operational expenditure and establishing limits on its growth rate.
- Intend to publish the liabilities of state-owned enterprises and those derived from turn-key projects.
- Considering establishing an independent fiscal council to:
  - Evaluate macroeconomic projections and underlying assumptions in the budget.
  - Monitor and assess implementation of the fiscal rule, including reviewing structural contributions from the canal and the link between the net debt target and the future path of deficit targets.
- Authorities are willing to consider introducing a multi-year budgetary process to provide guidance to policy makers and ensure accountability for adhering to targets.

### Revenue administration: gaps and measures
- Panama’s revenue-to-GDP ratio was 9.6 percent in 2014, while the average for CAPDR and South American countries was 13.9 and 20.3 percent, respectively.
- VAT evasion has been estimated at about 40 percent.
- The tax authorities have applied three tax amnesties in the past six years; authorities recognize that tax amnesties erode tax compliance and undermine the credibility of the tax authority when used repeatedly.
- Measures taken and planned:
  - Partial VAT withholding by the 160 largest companies implemented in February 2016, with an estimated collection of US$100–200 million (0.2–0.4 percent of GDP).
  - A call center set up to notify taxpayers of pending obligations and speed up collection.
  - Plan to launch a new tax filing system (eTax II) to facilitate tax compliance.
  - Ongoing efforts to enhance human capital in the revenue administration.
- There is no plan, however, to review and streamline the numerous and complicated schemes of tax exemptions.

### Public services and procurement
- Investment and maintenance of water and sanitation infrastructure have not kept pace with economic and residential development, partly due to low and outdated tariffs.
- Authorities plan investments in infrastructure to improve reliability and access to public services.
- Proposed procurement modifications to combat corruption and increase transparency include:
  - Identifying contractors’ beneficiary owners.
  - Eliminating abbreviated and urgent tenders that had lower standards for eligibility of contractors.
  - Adopting auction tendering procedures and greater transparency.

### Pension system fiscal pressures and reform options
- The pension system includes two subsystems: a subsystem of defined benefit and a subsystem of mixed defined benefit and defined contribution.
- Actuarial studies indicate that, absent parametric reforms:
  - The exclusively defined benefit subsystem starts to incur cash losses in 2015, and reserves will be depleted in 2027.
  - Between 2027 and 2060, expenditure of the defined benefit subsystem would impose fiscal pressure of 1–2 percentage points of GDP.
- Parametric reform is needed to ensure adequate financing of the pension system.
- Staff-suggested reform options include increasing the retirement age and reducing the replacement rate.
- There would be merit in combining the reserves of the two systems to take a consolidated approach to asset-liability management.
- Demographic note: The current dependency ratio is about 16 percent (ratio of population aged 60 years and above to those aged between 19 and 60) and is projected to reach 36 percent in 2060.

### Financial integrity, AML/CFT, and tax transparency
- FATF removed Panama from the “gray list” at the February 18 plenary meeting, recognizing progress in the AML/CFT framework.
- Authorities are working to bring the framework into line with the revised 2012 FATF standard, including designating tax-related crimes as a predicate offense to money laundering.
- Panama is scheduled to undergo an assessment against the revised 2012 FATF standard in mid-2017.
- The recent U.S. Office of Foreign Assets Control designation of an extensive money laundering operation involving Panamanian corporate and financial institutions indicates urgent need to enhance the framework and enforce its provisions more assertively.
- Authorities committed to the long-term benefits of a financial sector grounded in transparency and expect ongoing AML/CFT improvements to help banks withstand pressures from global de-risking.
- Tax transparency actions and timeline:
  - OECD reported Panama among few countries not willing to adhere to the Common Reporting Standard (CRS).
  - On April 14, the Panamanian authorities announced full commitment to bilateral Automatic Exchange of Information (AEOI) following the OECD’s CRS by 2018 and to immediately begin implementing the CRS regulatory framework.
  - In late April, authorities initiated bilateral negotiations on tax information sharing with Colombia, France, Germany, and Japan.
  - On April 27, Panama and the United States signed an intergovernmental agreement for the automatic exchange of tax information governed by FATCA.
- Authorities state they have addressed international tax cooperation on a bilateral and reciprocal basis and that over 30 bilateral Tax Treaties and Tax Information Exchange Agreements (TIEA) have been signed since 2009.

### Banking sector health, risks, and liquidity
- The banking system is well capitalized and profitable, with an overall nonperforming loan ratio of below 2 percent.
- Certain business lines require greater vigilance:
  - Some banks have significant exposures in the CFZ where economic activity and property prices have been declining.
  - Signs of overcapacity in the commercial real estate market (office space, hotels, and shopping malls) and saturation in the high end of residential property raise risks of significant correction in prices.
  - Anecdotal evidence of aggressive competition in the low-income residential mortgage market with financing at high LTVs.
- Authorities’ preemptive measures:
  - Required additional loan-loss provisions for exposures in the CFZ.
  - Imposed higher risk weights for high LTV loans.
  - Planned release of a real estate price index in mid-2016 to improve monitoring.
- In the absence of a lender of last resort and deposit insurance, regulatory requirements need adaptation to generate larger liquidity buffers:
  - Official liquidity appears high at around 60 percent of deposits (twice the required 30 percent).
  - Supervisory data collection and liquidity regulation are not in line with the Basel III framework, complicating comprehensive assessment of bank liquidity.
  - Current regulation allows inclusion of all assets receivable within 186 days in liquid assets and certain below-investment-grade assets, inflating the liquidity ratio.
  - Liquid assets to total assets of Panama’s banking system are relatively low compared with other countries with similar exchange rate regimes.
- Staff urged harmonizing liquidity regulation with Basel III standards, including:
  - A more stringent definition of liquid assets.
  - A broader interpretation of short-term bank liabilities.
  - Collecting more granular sectoral and maturity breakdowns of balance sheet exposures.

### Financial sector supervision, contingency planning, and remaining FSAP recommendations
- The changing global environment may lead to consolidation in the banking sector; a healthy legal and regulatory environment would help ensure an orderly consolidation process.
- Staff and authorities agreed to continue improving domestic implementation of relevant international standards and expand outreach to regional banks, supervisors, the U.S. Treasury, and foreign correspondent banks to better understand drivers of loss of correspondent banking relationships.
- Staff encouraged development of a graduated contingency plan to handle a broader loss of correspondent banking relations, should that occur.
- Remaining priorities from the 2011 FSAP include:
  - Establishing a temporary liquidity facility for banks to address systemic shocks as an immediate priority.
  - Enhancing cross-border supervision and monitoring of systemic risk.
  - Significantly strengthening supervision of nonbank financial institutions because risks from nonbank institutions can potentially spill over to the banking sector and threaten financial stability.

*Source: IMF staff report content provided in the supplied document.*

### 29.      The authorities agreed on the need to modernize financial supervision according to

### _cr16337 - 29.      The authorities agreed on the need to modernize financial supervision according to

### Financial supervision and financial safety net
- Authorities agreed on the need to modernize financial supervision according to international standards and to strengthen the financial safety net.
- Recent efforts include adopting parts of Basel II/III banking regulations, including a pilot project exploring the implementation of the Liquidity Coverage Ratio.
- Authorities agreed on the need to:
  - establish a liquidity facility for banks, and
  - develop a plan to coordinate the response to a large unexpected adverse shock to the financial system.
- Authorities noted the Panamanian banking sector has been remarkably stable, including during the 2008–09 global financial crisis, and therefore they do not perceive significant financial stability risks at present.
- Authorities and staff shared concern about slow progress towards risk-based supervision of nonbank financial intermediaries, with capacity constraints identified as an important impediment.

### Ensuring a sustainable and inclusive growth path
- Authorities emphasized achieving more inclusive growth is a top strategic objective.
- Achievements and challenges:
  - Strong economic performance led to significant poverty reduction over the last decade.
  - Indigenous areas continue to experience substantially higher poverty and worse social outcomes than the rest of the country, partly due to low connectivity and difficulty of accessing public services from remote locations.
- Actions and commitments:
  - Increased public policy attention to indigenous communities; progress limited in part due to low connectivity and access challenges.
  - Measures to improve targeting and effectiveness of social assistance programs, strengthen monitoring of conditional cash transfers, and provide specific support for the elderly and the disabled.
  - Authorities reiterated strong commitment to ensuring full access to public services and social assistance to indigenous communities and other socially vulnerable groups.
- Human capital and education:
  - Staff and authorities agreed enhancing human capital is crucial for sustaining high and inclusive growth.
  - Panama lags behind peer countries on student achievement scores, school enrollment, and education spending (Figure 6).
  - Education reform package priorities (especially focused on indigenous and remote rural areas) include:
    - higher investment in education infrastructure,
    - renovation of schools and classrooms,
    - introduction of an extended school day,
    - upgraded training curricula for teachers,
    - specific programs to improve foreign language and technical skills.
  - Initiatives to focus on vocational training and foster collaboration between education institutions and companies to narrow skills gaps and facilitate labor reallocation after completion of large infrastructure projects.
  - Strengthened assessment and accountability at different stages of the education process to help translate reform efforts into outcomes.

### Other issues: price controls and data reporting
- Price controls:
  - Staff encouraged authorities to discontinue price controls.
  - Authorities introduced price controls on particular varieties of 22 basic food products in July 2014 for an initial period of six months and repeatedly extended them afterwards.
  - Staff view: price controls distort market conditions, give misleading signals, and are often ineffective to tackle lack of competition; advised phasing them out taking advantage of declining international food and fuel prices.
  - Authorities emphasized they currently do not have plans to discontinue the price controls as concerns about lack of competition in food retail persist.
- Data reporting:
  - Further improvements in timeliness and consistency of data reporting will help macroeconomic surveillance and assessment of risks.
  - Publication of the full 2007-base national accounts was a notable improvement.
  - Weaknesses remain in availability, timeliness, and consistency of statistics relevant for macroeconomic monitoring.
  - Gaps in financial sector data (such as housing prices and corporate leverage) limit ability to properly assess risks.
  - Authorities are preparing an index of real estate prices and aim to continue improving data reporting standards.
  - Improvement in timeliness, coverage and consistency of socio-economic indicators will help public policy design.

### Staff appraisal — key findings and policy recommendations
- Economic outlook and buffers:
  - Panama remains one of the most dynamic economies in the region.
  - Economic growth was the highest in the region over the past decade, and the economic outlook remains favorable.
  - Robust growth expected alongside low inflation, declining public debt-to-GDP ratio, a stable financial system, and a declining current account deficit.
  - Panama’s buffers are well placed to cope with negative external shocks, though the uncertain external environment poses risks.
- AML/CFT and financial integrity:
  - Authorities should enhance and ensure effective implementation of the AML/CFT framework, particularly in light of recent revelations.
  - Removal from the FATF list of countries with strategic deficiencies in AML/CFT should not lead to complacency.
  - Recent announcement of U.S. sanctions against an extensive narcotics money laundering network based in Panama highlights the need for energetic enhancement of financial integrity and transparency—particularly on tax and entity transparency—and rigorous enforcement.
  - Doing so would place Panama in a strong position in advance of the next FATF assessment in mid-2017.
- Automatic exchange of tax information:
  - Panama’s commitment to bilateral Automatic Exchange of Information following the OECD’s Common Reporting Standard by 2018 is welcome and should be complemented with a rapid expansion of bilateral agreements with other jurisdictions.
- Fiscal framework and public finances:
  - Important advances made but additional reforms needed to strengthen fiscal framework.
  - Current framework institutional weakness calls for a simpler and more effective accountability framework, avoiding constant loosening through shortfalls of contributions from the canal.
  - Mechanisms should make the cost of noncompliance with fiscal rules explicit and detect and correct slippages in a timely fashion.
  - Staff welcome authorities’ openness to:
    - introduce a multi-year budgeting process,
    - establish an independent fiscal council to monitor and assess implementation,
    - combine the fiscal balance rule with a limit on growth of current expenditure to safeguard resources for capital investment.
  - Authorities encouraged to publish an assessment of consolidated assets and liabilities of the public sector and conduct analysis of all contingent liabilities to ensure the debt target is consistent with maintaining adequate buffers, especially in a dollarized economy.
- Pension system:
  - Large unfunded liabilities of the pension system need to be addressed to avoid crowding out other public spending.
  - In the absence of parametric reforms, reserves of the defined benefit system will be depleted in about a decade, and funding pension obligations thereafter would lead to an annual cost to the budget of 1–2 percent of GDP.
  - Staff welcome an informed national dialogue; early progress on reform would minimize adjustment and transition costs while maintaining space for other spending.
  - Reform options could include a gradual increase in the retirement age and a reduction in the replacement rate; merit in exploiting economies of scale via a consolidated approach to management of assets and liabilities of pension sub-systems.
- Revenue administration:
  - Strategy to strengthen and modernize revenue administration is essential.
  - Institutional capacity of revenue agencies needs strengthening.
  - Authorities’ efforts welcomed: VAT retention measures, development of an improved electronic tax platform, enhancements to human resources.
  - Complementary measures: develop a tax compliance strategy, broaden the tax base, improve availability and quality of data, develop proper incentives for tax compliance.
  - Staff encourage refraining from tax amnesties as they erode tax discipline and undermine credibility when used repeatedly.
- Financial sector reforms and liquidity:
  - Continue work to fully implement FSAP recommendations; efforts underway to improve banking regulations to comply with Basel II.
  - Cross-border supervision and systemic risk monitoring need enhancement via increased information exchange with home supervisors of foreign institutions.
  - Supervision of nonbank financial institutions needs strengthening by moving expeditiously to risk-based supervision.
  - In the absence of a lender of last resort and deposit insurance, regulatory requirements need adaptation to generate larger liquidity buffers against systemic shocks.
  - Local liquidity regulation is not in line with the Basel III framework, complicating comprehensive assessment.
  - Authorities should aim to align regulation with the Basel III liquidity framework to ensure sufficient high quality liquid assets, establish a temporary liquidity facility for banks to address systemic shocks, and develop a coordinated response plan for large unexpected adverse shocks.
- Inclusive growth and human capital:
  - Continued efforts to strengthen effectiveness of social assistance and improve public services for indigenous and vulnerable groups will help attain inclusive growth objectives.
  - Progress on education measures—renovations, extended school day, teacher qualifications, foreign language and technical skills programs—will help reduce skills shortages and improve competitiveness.
- Price controls and competition policy:
  - Low-inflation environment provides a timely opportunity to discontinue price controls, which are rarely effective and distort market conditions.
  - Concerns about lack of competition in retail sector can be more effectively addressed through the anti-trust legal framework.
- External position and data:
  - External position broadly consistent with fundamentals and desirable policy settings.
  - With winding down of large investment projects, mostly related to the canal expansion, the current account is expected to approach its norm determined by fundamentals and desirable policies.
  - Continued focus on strengthening timeliness, coverage, and consistency of statistics will help macroeconomic surveillance and improve public policy formulation.

*Source: IMF staff report (text provided).*

### 47.      Staff propose that the next Article IV consultation takes place on the standard

### _cr16337 - 47.      Staff propose that the next Article IV consultation takes place on the standard

### Risk Assessment Matrix — External risks, impacts, and policy responses
- Tighter or more volatile global financial conditions.
  - Likelihood/Severity: MM
  - Impact: Reduction in capital inflows/increase in capital outflows; difficulty in rolling over financing; freeze of foreign credit lines. Rise in spreads and domestic rates.
  - Effect/Policy Response: Deficit financing more tilted to domestic market. The fiscal deficits will need to be adjusted in order to avoid sharp increase in domestic rates and possible crowding out of private investment. Current account to adjust automatically through lower imports.
- Sharper-than-expected global growth slowdown:
  - Significant China slowdown
    - Likelihood/Severity: L/MM
    - Impact: Reduction in receipts from the canal and exports.
    - Policy Response: Need to move energetically forward with structural reforms to improve productivity and strengthen competitiveness. Current account to adjust automatically through lower imports.
  - Significant slowdown in other large EMs/frontier economies
    - Likelihood/Severity: MH
    - Impact: Slower growth, weaker exports and lower Canal revenues. Staff’s scenario implies that a sharp slowdown in EMs to the levels experienced after the Asian and the global financial crisis would lead to 1.8 pp lower growth, 0.5 percent of GDP higher fiscal deficit and 0.6 percent of GDP higher current account.
    - Policy Response: Same as above.
  - Structurally weak growth in key advanced and emerging economies
    - Likelihood/Severity: H/MM
    - Impact: Reduction in receipts from the canal and exports. Growth deceleration.
    - Policy Response: Same as above.
- Dislocation in capital and labor flows, in particular through reduced financial services by global/regional banks ("de-risking").
  - Likelihood/Severity: MH
  - Impact: Difficulties in accessing international finance and higher financing costs. Potential capital outflows.
  - Policy Response: The authorities need to intensify monitoring and supervision, and improve transparency. Financial sector consolidation.
- Persistently lower energy prices, triggered by supply factors reversing only gradually.
  - Likelihood/Severity: HL
  - Impact: Panama benefits from lower energy prices as a net importer of oil. More room to eliminate energy subsidies.
  - Policy Response: Need to reduce/eliminate energy subsidies. Use the opportunity to facilitate investment in energy sector to reduce energy costs when prices reverse.

### Risk Assessment Matrix — Domestic risks, impacts, and policy responses
- Fallout from the "Mossack Fonseca documents," delays in strengthening the AML/CFT framework, or delays in reaching agreements for the automatic exchange of tax information (AEOI).
  - Likelihood/Severity: MH
  - Impact: Reputational damage, reduced external funding and access to international financial services, higher borrowing costs, and increased scrutiny of Panamanian entities.
  - Policy Response: Enhance efforts in improving transparency and comply with international standards. Include tax crimes as a predicate offence for ML. Rapidly expand agreements for AEOI with countries.
- Relaxation of fiscal policy/deficit ceilings.
  - Likelihood/Severity: LHL
  - Impact: Larger borrowing and contribution to fiscal vulnerability. Reduced market confidence.
  - Policy Response: Build fiscal buffers and commit to fiscal targets below the SFRL ceilings.
- Climate change and possible insufficient supply of water for canal operation.
  - Likelihood/Severity: MM
  - Impact: Disruption of canal transit and negative impact on growth.
  - Policy Response: Strengthen water management. Invest in alternative water sources to ensure uninterrupted canal operation.
- Further disruption to the Canal expansion.
  - Likelihood/Severity: LL
  - Impact: Negative effects on growth and employment in the short term and exports and revenues in the medium term.
  - Policy Response: Improve efficiency of public investment. Review the fiscal framework, in particular the structural revenue from the canal.

### Real sector developments — key messages
- Growth:
  - "Growth is slowing... and the output gap has closed."
  - Recent growth has mainly been driven by the construction, wholesale and retail, and financial sectors; Zona Libre de Colon (ZLC) activity has slowed.
- Labor and inflation:
  - "Unemployment continued to increase, easing the pressure on wages..."
  - "...and inflation declined supported by lower oil prices and food price controls."

### Fiscal developments — key messages and trends
- Tax revenue:
  - "Tax revenues remain stable despite economic growth."
- 2015 fiscal and spending pattern:
  - "2015 deficit to GDP ratio decreased compared to 2014 ... largely due to cuts in capital spending..."
- Public debt and financing:
  - "Public debt to GDP ratio has been increasing ... and financing needs are expected to edge up."

### Financial sector developments — key messages
- Resident credit growth remained strong.
- Credit to commerce declined significantly in 2015 and is recovering slowly.
- Mortgage loans and lending to commerce are the largest components of banks' loan portfolios.
- Corporate lending rates are trending slightly upward.
- Spreads on sovereign debt are among the lowest in LAC.
- Nonresident credit and deposits recovered following a sharp deceleration associated with the HSBC departure.

### External sector developments — key messages
- Current account:
  - "The current account deficit has moderated..."
  - Current account continues to be largely financed by FDI. Panama remains an attractive destination for FDI. Reinvested earnings account for most of FDI.
- REER:
  - "The REER has been appreciating due to US $ movement."
- Imports:
  - Investment-related and oil imports have contracted.

### Structural and competitiveness indicators — key messages
- Panama's competitiveness and business environment remain among the best in LAC.
- Improvements in education and training can further enhance competitiveness.
- Strengthening tax discipline and insolvency resolution will help preserve the strong business environment.

### Selected economic and social indicators (highlights from Table 1)
- Population (millions, 2013): 3.9
- Poverty line (percent, 2013): 25.8
- Population growth rate (percent, 2013): 1.7
- Adult literacy rate (percent, 2010): 94.0
- Life expectancy at birth (years, 2012): 77.0
- GDP per capita (USD, 2013): 11,649
- Total unemployment (August, 2015): 5.1
- IMF Quota (SDR, million): 206.6

### Macro projections and major aggregates (selected)
- Real GDP (percent change):
  - 2012: 9.2
  - 2013: 6.6
  - 2014: 6.1
  - 2015: 5.8
  - 2016 (proj): 6.1
  - 2017 (proj): 6.4
- Consumer price index (average):
  - 2012: 5.7
  - 2013: 4.0
  - 2014: 2.6
  - 2015: 0.1
  - 2016 (proj): 0.8
  - 2017 (proj): 2.0
- Non-Financial Public Sector overall balance, excluding ACP (percent of GDP):
  - 2012: -1.5
  - 2013: -2.3
  - 2014: -3.2
  - 2015: -2.8
  - 2016 (proj): -3.1
  - 2017 (proj): -2.1
- Public debt of Non-Financial Public Sector (percent of GDP):
  - 2012: 35.7
  - 2013: 35.0
  - 2014: 37.1
  - 2015: 38.8
  - 2016 (proj): 39.4
  - 2017 (proj): 38.4
- Current account balance (percent of GDP):
  - 2012: -10.5
  - 2013: -9.8
  - 2014: -9.8
  - 2015: -6.5
  - 2016 (proj): -6.2
  - 2017 (proj): -5.0
- Foreign direct investment (percent of GDP):
  - 2012–2017: 8.7, 8.1, 8.1, 8.7, 8.8, 8.7 (by year)

### Fiscal operations — central government (selected, Table 3)
- Revenues and grants (percent of GDP):
  - 2012: 16.3
  - 2013: 15.4
  - 2014: 14.1
  - 2015: 13.9
  - 2016 (proj): 13.8
  - 2017 (proj): 14.1
- Total expenditure (percent of GDP):
  - 2012: 19.5
  - 2013: 19.2
  - 2014: 18.0
  - 2015: 18.0
  - 2016 (proj): 17.8
  - 2017 (proj): 16.7
- Overall balance (percent of GDP):
  - 2012: -3.2
  - 2013: -3.8
  - 2014: -4.0
  - 2015: -4.2
  - 2016 (proj): -4.0
  - 2017 (proj): -2.6

### Monetary and financial indicators (selected)
- Net foreign assets (millions of U.S. dollars, end-period):
  - 2011: 7,259
  - 2012: 5,847
  - 2013: 5,830
  - 2014: 5,996
  - 2015: 4,937
- Private sector credit (12-month percent change, Table 8):
  - 2011: 16.8
  - 2012: 14.1
  - 2013: 12.1
  - 2014: 9.1
  - 2015: 11.4
  - 2016 (proj): 2.8
  - 2017 (proj): 7.1
- Nonperforming loans as percent of total loans (banking system, end-of-period):
  - 2011: 1.3
  - 2012: 1.3
  - 2013: 1.1
  - 2014: 1.3
  - 2015: 1.1

### External position and vulnerabilities (selected)
- Current account (US$ millions, Table 6):
  - 2011: -4,523
  - 2012: -4,177
  - 2013: -4,401
  - 2014: -4,794
  - 2015: -3,377
  - 2016 (proj): -3,445
- Trade balance excluding Colón Free Zone (US$ millions):
  - 2011: -8,939
  - 2012: -10,262
  - 2013: -10,533
  - 2014: -11,203
  - 2015: -9,877
- Net international investment position (NIIP) (percent of GDP, Table 9):
  - 2011: -67.7
  - 2012: -66.2
  - 2013: -70.6
  - 2014: -71.9
  - 2015: -78.0
  - 2016 (proj): -79.1
  - 2017 (proj): -77.8
- Gross international reserves of the National Bank of Panama (millions of U.S. dollars, Table 8):
  - 2011: 2,733
  - 2012: 2,413
  - 2013: 3,144
  - 2014: 3,572
  - 2015: 3,713
  - 2016 (proj): 3,972
  - 2017 (proj): 4,311

### Policy recommendations and priorities (as presented)
- Adjust fiscal deficits to avoid sharp increases in domestic rates and crowding out of private investment; build fiscal buffers and commit to fiscal targets below SFRL ceilings.
- Move energetically forward with structural reforms to improve productivity and strengthen competitiveness.
- Intensify monitoring, supervision, and transparency in the financial sector; pursue financial sector consolidation.
- Reduce/eliminate energy subsidies and use lower energy prices to facilitate investment in the energy sector.
- Enhance AML/CFT framework, include tax crimes as predicate offences for ML, and rapidly expand agreements for AEOI.
- Strengthen water management and invest in alternative water sources to secure canal operations.
- Improve efficiency of public investment and review fiscal framework related to canal structural revenue.

*Source: _cr16337 - 47.      Staff propose that the next Article IV consultation takes place on the standard (extracted content).*

### Annex I. Implementation of Past IMF Policy Advice

### Annex I. Implementation of Past IMF Policy Advice

### Macroeconomic policy alignment and Director recommendations
- Authorities’ macroeconomic policies over the last year have been broadly in line with past Fund advice.
- During the 2015 Article IV consultation, Directors emphasized:
  - enhancing the fiscal framework and fostering resilience through strengthened fiscal buffers;
  - maintaining financial stability and sustaining strong and inclusive growth;
  - continued efforts to enhance revenue mobilization through capacity building and administrative reform;
  - expeditious resolution of remaining deficiencies to bring the financial integrity and transparency framework fully in line with international standards;
  - further enhancing the quality of public education and healthcare, upgrading skills; stimulating youth employment and female labor force participation to sustain equitable and inclusive growth.

### Fiscal policy
- 2015 fiscal deficit:
  - Budgeted at 3.7 percent of GDP.
  - Actual fiscal deficit was 2.8 percent of GDP.
- Measures to strengthen the fiscal framework and revenues:
  - Review of the current fiscal framework has started.
  - VAT retention mechanism implemented in February 2016.
  - A call center within the Directorate-General of Revenue (DGI) established to speed up tax collection.
  - Plan to launch a new tax filing system (eTax II) to facilitate tax compliance.

### Financial sector reforms
- Progress implementing 2011 FSAP recommendations:
  - Regulation on capital adequacy modified to bring it in line with the Basel III framework.
  - Banks required to take measures to identify the ultimate beneficiaries of their corporate clients.
  - Procedure for registration of custodians of bearer shares established.

### Transparency and AML/CFT
- Legislative reforms adopted to address weaknesses in the AML/CFT framework, aligned with the action plan agreed with FATF.
- FATF recognition in February 2016: Panama removed from the list of countries with strategic AML/CFT deficiencies.
- Authorities committed to continue enhancing effectiveness of the AML/CFT regime to align with the revised 2012 FATF standard.

### More inclusive growth and human capital
- Social protection programs are being enhanced and evaluated for better targeting.
- Education reforms:
  - Deeper emphasis on technical and language skills and on the training of teachers.
  - Vocational education being improved to address skill mismatches and shortages.
- Labor market measures:
  - A job market database (encompassing both employment opportunities and potential job applicants) has been initiated.

---

### Annex II. Implementation of 2011 FSAP Recommendations

### Banking Oversight
- Finalize and implement regulations on operational and interest rate risks.
  - The SBP issued a regulation on operational and market risk in December 2011 and is planning to introduce capital charges for these risks in line with the Basel 2.5 regulation in 2016.
- Enhance systemic risk monitoring and capacity to implement macroprudential policies.
  - New credit regulation incorporating dynamic provisioning and accounting treatment of restructured loans issued in May 2013.
  - Financial Coordination Council established in 2012 to improve coordination among agencies, joint onsite inspections, address regulatory gaps, and implement macroprudential policies.
  - A law addressing governance of banking groups released in 2011 and scheduled to be updated in 2017.
  - A draft law on trust funds released in January 2015 and to be presented to Congress in 2016; legislation on Certified Public Accountants is pending, but a register for external accountants is being established.
- Develop capital adequacy and regulatory reporting standards for holding companies.
  - Regulation establishing a minimum capital requirement for bank holdings issued in February 2015, aligning capital requirements for banks with Basel III rules, except the capital conservation buffer whose feasibility is still being studied.
- Develop concentration limits and risk management requirements for interbank deposits.
  - No plans to develop such explicit requirements; law allows introduction of limits and requirements for individual banks as needed.
- Enhance offsite supervision for macroprudential and systemic risk trends.
  - Off-site supervision improved in 2012 with monthly reporting requirements for banks to the SBP based on supervisory data.
  - SBP developed methodologies to identify systemically important banks and measure interconnectedness between banks.
  - SBP publishes a Financial Stability Report generally once a year (with an interim report for internal use). Planned upgrades include a more detailed survey of household indebtedness and information about house price developments.
- Regulate and effectively supervise cooperatives providing credit and savings products.
  - A draft law on cooperatives to upgrade regulation and strengthen supervision continues to be developed.

### Insurance Sector Oversight
- Approve draft Insurance Law with strengthened prudential requirements.
  - Law creating the Superintendency of Insurance adopted in 2012 (Ley 12-2012).
- Strengthen disclosure of performance indicators and brokers’ commissions.
  - Superintendency of Insurance has plans to implement these measures in 2016.

### Securities Market Oversight
- Strengthen budgetary position, supervisory and enforcement capabilities of the supervisor (National Securities Commission).
  - Law 67 (dated 1 September 2011) upgraded the Commission to a Superintendency (SMV), strengthening supervisory and enforcement capacity and budgetary position.
  - In 2014, plans for reform of the fee structure to bolster SMV’s budgetary position were developed and may be presented to the government in due course.
  - In 2015, a department for prevention of illicit activities, including AML/CFT issues, was established.
  - Fund TA is supporting development of risk-based supervision of the industry.

### Payments and Securities Systems Oversight
- Create a comprehensive payments system law guaranteeing payment finality.
  - A committee is elaborating a law and/or regulation that would take effect by year-end 2016.
- Adopt an RTGS or Hybrid Payments System.
  - Tentative date for implementation of a RTGS, deemed to lower systemic risk, is March 2017.

### Financial Safety Nets
- Conclude studies and introduce a bank liquidity facility.
  - Ongoing. Authorities plan to establish a liquidity fund that may be sourced from bank contributions, public sector funding, and external credit lines.
- Establish a deposit insurance scheme.
  - No initiatives so far.

### Capital Market Development
- Build a single yield curve across domestic and global bonds by dual listing and extending market making to global bonds.
  - Ongoing. Since 2011, the Ministry of Economy and Finance has published information about yields of Panamanian government bonds of different maturities. Development of a yield curve for corporate bonds is pending. Authorities have been making efforts to extend market making to global bonds.
- Review and restructure or close public development banks and guarantee funds.
  - No initiatives so far.

---

### Annex III. External Sector Assessment

### Overall assessment
- A temporarily excessive current account deficit is steadily decreasing, and there is no compelling evidence of a real exchange rate (REER) misalignment.

### Current account (CA) dynamics
- The CA deficit has been larger than the value explained by fundamentals and desirable policies since the mid-2000s—apart from the sharp adjustment during the global crisis—but the gap has moderated and stands now at about 2 percent.
- Canal-related imports are estimated at about 1.5 percent of GDP.
- Correcting the headline CA balance for canal-related imports significantly decreases the deviation of the CA from fundamentals.
- Strong and stable FDI inflows are expected to continue to finance the bulk of external CA deficits in the coming years.
- External debt is deemed sustainable and resilient to shocks.

### Numerical results (as presented)
- EBA Approach: Actual CA/Y = -6.5; Underlying CA/Y = -4.4; CA/Y NormNFA/Y = -2.1; NFA/Y-stabilizing CA/Y = -10.4
- EBA Approach with adjusted CA: Actual CA/Y = -5.0; Underlying CA/Y = -4.4; CA/Y NormNFA/Y = -0.6; NFA/Y-stabilizing CA/Y = -2.9
- ES Approach: Actual CA/Y = -6.5; Underlying CA/Y = -78.0; CA/Y NormNFA/Y = -5.8; NFA/Y-stabilizing CA/Y = -0.8; CA/Y gapREER gap = -3.8

(Note: The text explains that the -2.1 percent short term CA gap calculated with the EBA methodology consists of a 0.6 percent policy gap and a -2.7 percent residual; the residual can be attributed to a temporary investment boom.)

### Real exchange rate (REER) assessment
- The REER does not appear misaligned when taking into account the CA adjustment over the medium term.
- During 2015, excluding Venezuela:
  - NEER appreciated by 9.3 percent.
  - REER went up by 8.0 percent.
  - (Including Venezuela, the REER appreciated by 1.3 percent.)
- Factors mitigating concerns from REER appreciation:
  - Appreciation accompanied by a positive terms of trade shock through lower oil prices, which lowered external imbalances.
  - Full pass-through to inflation of nominal depreciations experienced by regional trading partners should partly reverse the recent REER appreciation.
  - Exports of services (over 90 percent of Panama’s exports) were resilient with a 13 percent increase in nominal terms in 2015.
- Risk: If current pressures persist, more price-sensitive service exports, such as tourism, may eventually be affected.

### Competitiveness and structural challenges
- Panama ranks second, after Chile, in the Global Competitiveness Index.
- Panama’s strengths: financial market development, infrastructure, and goods market efficiency.
- Main challenges: health and primary education, higher education and training, labor market efficiency, and institutions. An inadequately educated workforce is cited as a major impediment to doing business.
- World Bank’s 2016 Doing Business report: Panama ranks behind Costa Rica, Colombia, Chile and Peru; strengths in trading across border and access to credit; lagging in ease of paying taxes, enforcing contracts and resolving insolvency.

### International reserves and liquidity considerations
- International reserves appear low by standard reserves metrics, although interpretation is difficult for a fully dollarized economy without a central bank.
- Official reporting of reserves is close to the net foreign assets of the main public bank (Banco Nacional de Panama).
- Government has access to other U.S. dollar assets such as the Sovereign Wealth Fund and deposits held in domestic banks, but speed of utilization in a systemic liquidity shortage is unclear.
- Policy recommendation: In the absence of a lender of last resort, authorities need to build policy buffers and lessen vulnerabilities, including by:
  - establishing a liquidity facility for banks; and
  - developing a contingency plan to coordinate the response to a large unexpected shock to the financial system.

*Source: Annex I–III, _cr16337 - Annex I. Implementation of Past IMF Policy Advice_*

### Annex IV. Debt Sustainability Analysis (DSA)

### Annex IV. Debt Sustainability Analysis (DSA)

### Panama: Public Sector DSA – Baseline Scenario (As of December 31, 2015)
- Nominal gross public debt (in percent of GDP) by year:
  - 2014: 44.7
  - 2015: 37.1
  - 2016: 38.8
  - 2017: 39.6
  - 2018: 38.8
  - 2019: 37.2
  - 2020: 35.8
  - 2021: 34.3
  - [projection continuing] 32.9
- Public gross financing needs (in percent of GDP):
  - 2014: 3.2
  - 2015: 3.4
  - 2016: 4.0
  - 2017: 5.3
  - 2018: 7.0
  - 2019: 9.0
  - 2020: 10.5
  - 2021: 13.5
  - [projection continuing] 15.9
- Sovereign spreads and market indicators:
  - EMBIG (bp) 3/240 (listed adjacent to table)
  - 5Y CDS (bp) 182
- Growth and inflation:
  - Real GDP growth (percent) by year: 2014: 7.9; 2015: 6.1; 2016: 5.8; 2017: 6.1; 2018: 6.4; 2019: 6.7; 2020: 6.3; 2021: 6.0; [projection] 6.0
  - Inflation (GDP deflator, percent) by year: 2014: 4.7; 2015: 3.4; 2016: 0.2; 2017: 0.8; 2018: 2.0; 2019: 2.0; 2020: 2.0; 2021: 2.0; [projection] 2.0
  - Nominal GDP growth (percent) by year: 2014: 13.0; 2015: 9.6; 2016: 6.0; 2017: 6.9; 2018: 8.5; 2019: 8.8; 2020: 8.4; 2021: 8.1; [projection] 8.1
- Effective interest rate (percent) 4/ (interest payments divided by prior-year debt stock):
  - 2014: 6.6
  - 2015: 5.3
  - 2016: 5.1
  - 2017: 4.9
  - 2018: 4.8
  - 2019: 4.7
  - 2020: 4.8
  - 2021: 4.4
  - [projection] 4.8
- Change in gross public sector debt (percent of GDP) and cumulative:
  - 2014: -3.0
  - 2015: 2.1
  - 2016: 1.7
  - 2017: 0.9
  - 2018: -0.8
  - 2019: -1.6
  - 2020: -1.5
  - 2021: -1.5
  - cumulative: -5.9
- Identified debt-creating flows (percent of GDP) and cumulative:
  - 2014: -4.3
  - 2015: 0.2
  - 2016: 0.8
  - 2017: 0.9
  - 2018: -0.8
  - 2019: -1.5
  - 2020: -1.4
  - 2021: -1.4
  - cumulative: -5.4
- Primary balance and fiscal items (percent of GDP):
  - Primary deficit (percent of GDP) series: 2014: -1.7; 2015: 1.5; 2016: 1.1; 2017: 1.7; 2018: 0.6; 2019: 0.0; 2020: -0.1; 2021: -0.3; [projection 2021?] -0.3; cumulative 1.6 (as listed)
  - Primary (noninterest) revenue and grants (percent of GDP), cumulative: 22.9 (2014) 20.4 (2015) 20.3 (2016) 19.9 (2017) 20.1 (2018) 20.0 (2019) 19.7 (2020) 19.6 (2021) 19.6 (cumulative?) 119.0
  - Primary (noninterest) expenditure (percent of GDP), cumulative: 21.2 (2014) 21.9 (2015) 21.4 (2016) 21.6 (2017) 20.7 (2018) 20.0 (2019) 19.5 (2020) 19.3 (2021) 19.3 (cumulative?) 120.5
- Automatic debt dynamics (percent of GDP):
  - Contribution by year: 2014: -2.6; 2015: -1.4; 2016: -0.3; 2017: -0.7; 2018: -1.4; 2019: -1.5; 2020: -1.3; 2021: -1.1; [projection] -1.1; cumulative: -7.0
  - Interest rate/growth differential equals same series: -2.6; -1.4; -0.3; -0.7; -1.4; -1.5; -1.3; -1.1; -1.1; -7.0
  - Of which: real interest rate series: 0.8; 0.6; 1.7; 1.5; 1.0; 0.9; 0.9; 0.9; 0.8; cumulative 6.0
  - Of which: real GDP growth contribution: -3.4; -1.9; -2.0; -2.2; -2.3; -2.4; -2.2; -2.0; -1.9; cumulative -13.0
- Exchange rate depreciation (percent contribution) 7/: 0.0 in listed years
- Other identified debt-creating flows: 0.0 across listed years
- Residual, including asset changes (percent of GDP):
  - 2014: 1.3
  - 2015: 1.9
  - 2016: 0.9
  - 2017: -0.1
  - 2018: -0.1
  - 2019: -0.1
  - 2020: -0.1
  - 2021: -0.1
  - cumulative: -0.5
- Debt-stabilizing primary balance listed as -1.1 (footnote number alignment shows "-1.1 balance 9/ primary")

### Composition of Public Debt and Alternative Scenarios
- Underlying assumptions (percent):
  - Baseline scenario key variables:
    - Real GDP growth (2016–2021): 6.1, 6.4, 6.7, 6.3, 6.0, 6.0
    - Inflation (2016–2021): 0.8, 2.0, 2.0, 2.0, 2.0, 2.0
    - Primary Balance (2016–2021): -1.7, -0.6, 0.0, 0.1, 0.3, 0.3
    - Effective interest rate (2016–2021): 4.9, 4.8, 4.7, 4.8, 4.8, 4.8
  - Historical scenario key variables:
    - Real GDP growth (2016–2021): 6.1, 7.6, 7.6, 7.6, 7.6, 7.6
    - Inflation (2016–2021): 0.8, 2.0, 2.0, 2.0, 2.0, 2.0
    - Primary Balance (2016–2021): -1.7, 1.2, 1.2, 1.2, 1.2, 1.2
    - Effective interest rate (2016–2021): 4.9, 4.8, 4.6, 4.6, 4.6, 4.5
  - Constant Primary Balance Scenario:
    - Primary Balance held at -1.7 for 2016–2021
    - Real GDP growth and inflation as baseline; effective interest rate listed as 4.9, 4.8, 4.6, 4.7, 4.6, 4.6
- Composition of public debt charts (descriptive):
  - Gross nominal public debt and public gross financing needs presented as percent of GDP across 2014–2021 (figures provided in charts, no additional numeric detail beyond above).

### Public DSA Stress Tests
- Two stress tests summarized:
  - Financial contingent liability shock (near-term):
    - Assumptions:
      - One-standard-deviation shock to GDP growth in 2016–17
      - Public expenditures shock equal to 10 percent of banking system’s assets in 2016
      - For every 1 percentage of GDP increase in primary balance, financing costs increase by 25 basis points
    - Outcome:
      - Public debt increases to 54 percent of GDP in 2017-18 under this scenario, but remains on a declining path thereafter
  - Medium-term output and financial condition shock (combined):
    - Assumptions:
      - GDP growth slows to 4 percent from 2016 onward
      - Financing costs increase by 400 basis points compared to baseline
      - This shock noted as similar to 2009 crisis
    - Outcome:
      - The impact on public debt is limited
- Financial Contingent Liability Shock detailed annual assumptions and outcomes (percent or bpts):
  - Real GDP growth (2016–2021): 6.1%; 3.3%; 3.6%; 6.3%; 6.0%; 6.0%
  - Inflation (GDP Deflator change) (2016–2021): 0.8%; 1.2%; 1.2%; 2.0%; 2.0%; 2.0%
  - Non-interest revenue-to-GDP ratio (2016–2021): 19.9%; 20.1%; 20.0%; 19.7%; 19.6%; 19.6%
  - Non-interest expenditure-to-GDP ratio (2016–2021): 21.6%; 33.6%; 20.0%; 19.5%; 19.3%; 19.3%
  - Primary Balance (2016–2021): -1.7%; -13.5%; 0.0%; 0.1%; 0.3%; 0.3%
  - Interest rate shock (bpts) compared to baseline: 0; 32; 300; 0; 0; 0
- Combined Real GDP and Financial Condition Shock detailed (percent or bpts):
  - Real GDP growth (2016–2021): 6.1%; 4.0%; 4.0%; 4.0%; 4.0%; 4.0%
  - Inflation (GDP Deflator change) (2016–2021): 0.8%; 2.0%; 2.0%; 2.0%; 2.0%; 2.0%
  - Non-interest revenue-to-GDP ratio (2016–2021): 19.9%; 18.1%; 18.0%; 17.7%; 17.6%; 17.6%
  - Non-interest expenditure-to-GDP ratio (2016–2021): 21.6%; 20.7%; 20.0%; 19.5%; 19.3%; 19.3%
  - Primary Balance (2016–2021): -1.7%; -2.6%; -2.0%; -1.9%; -1.7%; -1.7%
  - Interest rate shock (bpts) compared to baseline: 0; 400; 400; 400; 400; 400

### Panama: External Debt Sustainability Framework (2010–2021)
- Baseline external debt (percent of GDP) by year:
  - 2010: 105.9
  - 2011: 107.0
  - 2012: 99.1
  - 2013: 97.0
  - 2014: 99.8
  - 2015: 104.9
  - 2016: 102.7
  - 2017: 96.9
  - 2018: 91.5
  - 2019: 86.7
  - 2020: 81.1
  - 2021: 77.3
  - Debt-stabilizing non-interest current account: -8.2
- Change in external debt (percent of GDP) by year:
  - 2010: -2.6
  - 2011: 1.1
  - 2012: -7.9
  - 2013: -2.1
  - 2014: 2.8
  - 2015: 5.1
  - 2016: -2.3
  - 2017: -5.7
  - 2018: -5.4
  - 2019: -4.8
  - 2020: -5.6
  - 2021: -3.7
- Identified external debt-creating flows (4+8+9) by year:
  - 2010: -6.3
  - 2011: -12.3
  - 2012: -13.2
  - 2013: -9.1
  - 2014: -6.8
  - 2015: -7.9
  - 2016: -8.7
  - 2017: -9.7
  - 2018: -9.0
  - 2019: -8.5
  - 2020: -8.2
  - 2021: -7.9
- Current account deficit, excluding interest payments (percent of GDP) by year:
  - 2010: 5.3
  - 2011: 8.3
  - 2012: 6.0
  - 2013: 5.7
  - 2014: 6.1
  - 2015: 2.8
  - 2016: 2.5
  - 2017: 1.4
  - 2018: 0.3
  - 2019: -0.2
  - 2020: -0.7
  - 2021: -1.2
- Deficit in balance of goods and services (percent of GDP) by year:
  - 2010: 3.2
  - 2011: 8.1
  - 2012: 5.0
  - 2013: 3.9
  - 2014: 4.6
  - 2015: -0.6
  - 2016: 0.7
  - 2017: -0.8
  - 2018: -2.4
  - 2019: -2.7
  - 2020: -3.0
  - 2021: -3.0
- Exports and imports (percent of GDP) by year:
  - Exports: 2010: 37.4; 2011: 39.8; 2012: 41.3; 2013: 39.1; 2014: 35.6; 2015: 33.2; 2016: 32.3; 2017: 33.2; 2018: 34.2; 2019: 34.0; 2020: 33.8; 2021: 33.5
  - Imports: 2010: 40.7; 2011: 47.9; 2012: 46.3; 2013: 43.0; 2014: 40.2; 2015: 32.6; 2016: 32.9; 2017: 32.4; 2018: 31.8; 2019: 31.3; 2020: 30.8; 2021: 30.5
- Net non-debt creating capital inflows (negative, percent of GDP):
  - 2010: -8.3
  - 2011: -8.7
  - 2012: -8.7
  - 2013: -8.1
  - 2014: -8.1
  - 2015: -8.7
  - 2016: -8.8
  - 2017: -8.7
  - 2018: -7.0
  - 2019: -6.7
  - 2020: -6.3
  - 2021: -5.9
- Automatic debt dynamics (percent of GDP) by year:
  - 2010: -3.3
  - 2011: -11.9
  - 2012: -10.5
  - 2013: -6.7
  - 2014: -4.8
  - 2015: -2.0
  - 2016: -2.3
  - 2017: -2.4
  - 2018: -2.3
  - 2019: -1.6
  - 2020: -1.1
  - 2021: -0.8
  - Contribution from nominal interest rate (percent): 5.4; 4.9; 4.4; 4.1; 3.7; 3.7; 3.7; 3.7; 3.7; 3.7; 3.7; 3.7
  - Contribution from real GDP growth (percent): -5.8; -10.5; -8.5; -5.8; -5.4; -5.4; -6.0; -6.1; -6.0; -5.3; -4.8; -4.5
  - Contribution from price and exchange rate changes 3/:  -3.0; -6.3; -6.4; -5.0; -3.1; -0.2; ... (ellipsis appears in source)
- Residual, including change in gross foreign assets (percent of GDP) by year:
  - 2010: 3.7
  - 2011: 13.4
  - 2012: 5.3
  - 2013: 7.0
  - 2014: 9.7
  - 2015: 12.9
  - 2016: 6.4
  - 2017: 4.0
  - 2018: 3.6
  - 2019: 3.7
  - 2020: 2.5
  - 2021: 4.1
- External debt-to-exports ratio (percent):
  - 2010: 283.0
  - 2011: 268.7
  - 2012: 240.2
  - 2013: 248.4
  - 2014: 280.8
  - 2015: 315.9
  - 2016: 318.2
  - 2017: 292.1
  - 2018: 268.0
  - 2019: 255.4
  - 2020: 239.9
  - 2021: 230.7
- Gross external financing need (in billions of US dollars) and percent of GDP:
  - US$ billions by year: 2010: 9.1; 2011: 12.3; 2012: 13.0; 2013: 13.6; 2014: 16.0; 2015: 16.0; 2016: 16.6; 2017: 16.4; 2018: 16.8; 2019: 17.7; 2020: 20.1; 2021: 21.5
  - In percent of GDP by year: 2010: 31.6; 2011: 35.7; 2012: 32.5; 2013: 30.2; 2014: 32.4; 2015: 30.7; 2016: 29.7; 2017: 27.1; 2018: 25.6; 2019: 24.8; 2020: 26.0; 2021: 25.8
- Scenario with key variables at their historical averages (external debt percent of GDP shown):
  - Series: 104.9; 99.4; 92.9; 86.1; 79.6; 72.2; 66.3; -12.7 (last figure appears adjacent and formatted as in source)

### Key Macroeconomic Assumptions Underlying Baseline (selected)
- Real GDP growth (percent) historical and projections:
  - 2005–2013 actual aggregate: 5.8; 11.8; 9.2; 6.6; 6.1; 5.8; 6.1; 6.4; 6.7; 6.3; 6.0; 6.0 (as listed)
- GDP deflator in US dollars (change, percent): 2.8; 6.3; 6.4; 5.3; 3.4; 0.2; 0.8; 2.0; 2.0; 2.0; 2.0; 2.0
- Nominal external interest rate (percent): 5.4; 5.5; 4.8; 4.7; 4.2; 3.9; 3.8; 3.9; 4.1; 4.4; 4.6; 4.9
- Growth of exports (US$ terms, percent): 0.9; 26.5; 20.5; 6.3; -0.2; -1.0; 3.9; 11.6; 12.0; 7.8; 7.6; 7.2
- Growth of imports (US$ terms, percent): 22.2; 40.0; 12.3; 4.3; 2.5; -13.9; 7.9; 6.7; 6.8; 6.8; 6.4; 6.9
- Current account balance, excluding interest payments (percent of GDP): -5.3; -8.3; -6.0; -5.7; -6.1; -2.8; -2.5; -1.4; -0.3; 0.2; 0.7; 1.2
- Net non-debt creating capital inflows (percent of GDP): 8.3; 8.7; 8.7; 8.1; 8.1; 8.7; 8.8; 8.7; 7.0; 6.7; 6.3; 5.9

### External Debt Sustainability: Bound Tests and Shocks (summary)
- Bound tests include permanent one-half standard deviation shocks to variables and scenarios:
  - Interest rate shock, CA shock, Non-interest current account shock, Combined shock, Real depreciation shock (one-time real depreciation of 30 percent in 2016), Growth shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, current account balance noted)
- Selected headline figures shown in charts:
  - Baseline external debt around 77 (percent of GDP) for projection years
  - Historical scenario figure: 66
  - Combined shock peak indicated as 112 (percent of GDP) in chart context
  - Gross financing need under baseline cited as 85 (right scale in chart)

*Source: IMF staff.*

### 0.5 percent in 2018 and thereafter. It also introduced a mechanism to smooth expenditure and to

### _cr16337 - 0.5 percent in 2018 and thereafter. It also introduced a mechanism to smooth expenditure and to

### Canal contributions, adjusted fiscal balance, and Fondo de Ahorro de Panamá (FAP)
- Starting in 2015, any canal contributions above 3.5 percent of GDP would be saved in the Fondo de Ahorro de Panamá (FAP, sovereign wealth fund).
- The overall fiscal deficit would be allowed to expand by any shortfall of canal contributions to the budget below 3.5 percent of GDP.
- NFPS deficit ceilings stipulated in the SFRL apply to the adjusted fiscal balance, defined as:
  - adjusted fiscal balance = overall fiscal balance adjusted by the difference between the actual canal contribution and the 3.5 percent of GDP threshold.
- Due to the delay in the canal expansion, the rebasing and upward revision of GDP data, and higher-than-expected growth:
  - canal contributions are now projected to be only about 2.5–3 percent of GDP in the medium term instead of about 4 percent of GDP previously projected.
  - Therefore, the overall fiscal deficit is expected to be about 1 percent of GDP higher per year than envisaged compared with the adjusted balance.
- Although the medium-term fiscal stance entails a consolidation of about 2 percentage points of GDP in five years and a downward trajectory of the debt to GDP ratio, it is unlikely that resources will be transferred to the FAP in the foreseeable future.

### 2012 FAP law: escape clauses, limits, and rules
- The 2012 FAP law modified conditions under which escape clauses could be used and eliminated the possibility of carry-over.
- Temporary suspension of deficit ceilings can be used in the following cases:
  i. National emergency declared by the Cabinet.
     - In this case the maximum additional deficit in the year that the emergency occurs cannot exceed 1.5 percent of GDP or the cost associated with the emergency, whichever is less.
  ii. Economic deceleration—GDP grows 2 percent or less during two consecutive quarters, based on figures published by the National Institute of Statistics.
     - In this case, the maximum additional deficit allowed is scaled to the magnitude of the deceleration but capped at 2 percent of GDP at a negative growth, and the size of the exemption requested has to be justified.
     - The return to the ceiling should be achieved by the third year with 1/3 of the adjustments in each year, provided the rate of growth of real GDP remains below 2 percent during that period.

### Fiscal implications and near-term outlook
- Projected canal contribution: about 2.5–3 percent of GDP in the medium term (revised down from about 4 percent of GDP).
- Fiscal impact:
  - Overall fiscal deficit expected to be about 1 percent of GDP higher per year than would be implied by the adjusted balance (given the 3.5 percent of GDP threshold).
  - Medium-term consolidation target: about 2 percentage points of GDP in five years.
  - Debt to GDP ratio: downward trajectory anticipated under the medium-term fiscal stance.
- Practical expectation:
  - Unlikely that resources will be transferred to the FAP in the foreseeable future due to lower-than-expected canal contributions.

### Data, transparency, and related statistical context (selected extracts)
- Since the change of the base year of the national accounts (NA) to 2007, the rebased NA data from the production approach were published for 2007–2015. NA data from the expenditure and income approaches are available for 2007–2014.
- Information on the Panama Canal Authority (ACP) is only available in the Annual Report posted on its website on a fiscal-year basis; a need exists to ensure a consistent and timely flow of ACP statistics.
- In 2011 three public enterprises were excluded from the NFPS accounts and public debt (Tocumen International Airport, ETESA, and ENA); compiling and disseminating information on these entities in a timely fashion is necessary.
- The 2012 decree establishing the FAP mandated reporting of deferred payment schemes (e.g. turnkey projects) in budget documentation.
- The authorities launched a new platform for centralized management of public sector financial information (Integración y Soluciones Tecnológicas del Modelo de Gestión Operativa, ISTMO), which would help enhance transparency and efficiency.

*Source: PANAMA STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 5, 2016).*

### 1.      Real GDP growth is expected to accelerate in 2016, being among the highest rates

### _cr16337 - 1.      Real GDP growth is expected to accelerate in 2016, being among the highest rates

### Real GDP, labor market, and outlook
- MEF projects real GDP to increase 6.3 percent in 2016, compared to 5.8 percent in 2015, and forecasts it to expand around 6 percent over the medium term.
- Unemployment rate edged up to 5.1 percent in 2015 from 4.8 percent in 2014, but remains close to historical lows.
- Start or continuation of large infrastructure projects and robust FDI inflows are expected to enhance job creation.

### Major infrastructure projects (highlights and status)
- Canal expansion starts operating next month.
- Third bridge over the Canal: US$450 million (under construction).
- Urban renewal of Colon City: US$570 million (under construction).
- Second metro line: US$2.1 billion; was tendered in mid-2015 and has been 10 percent done.
- Expansion of Tocumen international airport terminal: US$800 million; more than 50 percent concluded; airport expected to handle 15 million passengers per year from the current 8 million capacity.
- Cross-country high-voltage transmission line: US$800 million; will be concluded by the end of 2016.
- Planned tender in May 2016 for third metro line monorail system: US$2.6 billion—to be financed by Japan International Cooperation Agency (JICA).
- Planned tender in early 2017 for the fourth bridge over the Panama Canal: US$1.0 billion.

### Private investment and FDI
- FDI hit its highest level on record at US$4.5 billion in 2015, reaching almost 9 percent of GDP.
- FDI focus: mining, energy, transportation, and container storage.
- Minera Panama copper mine project: US$6.0 billion; about 40 percent complete with 5,600 workers on-site; copper exports expected to initiate in 2018.
- AES gas-project: US$1.0 billion; expected to start generating power in 2018.
- Chan II hydro-project: US$1.0 billion; expected to start generating power in 2019.
- Large capital expenditure in port expansion and container storage facilities completed to service larger vessels after Canal expansion inauguration.

### Inflation and external sector
- Consumer price inflation declined to 0.2 percent in 2015 compared to 1.0 percent in 2014.
- Contributing factors: lower commodity prices (mostly oil), appreciation of the U.S. dollar, and lower prices for services.
- Authorities maintained price controls over 22 out of 59 food products; no supply shortage in those products during 2015.
- Current account deficit reduced to 6.5 percent of GDP in 2015 compared to 10 percent of GDP in 2014.
  - Decline due partly to wind-down of large infrastructure projects with high import content and lower commodity import costs.
  - Foreseen start of new large infrastructure projects might generate pressure on external accounts, but imbalances are expected to remain comfortably financed by continued strong FDI inflows.

### Fiscal policy and public financial management
- Preliminary MEF estimates: fiscal deficit in the non-financial public sector (NFPS) reached 2.2 percent of GDP in 2015.
  - This is below the expected fiscal deficit of 3.7 percent of GDP and outperforms the NFPS deficit of 3.4 percent of GDP in 2014 (according to MEF’s methodology).
- 2016 overall fiscal deficit ceiling is approximately 3.1 percent of GDP.
- Use of future Canal revenues and the Social and Fiscal Responsibility Law (SFRL) framework aim to support consolidation, public debt reduction, and fiscal discipline.
- NFPS gross debt reached 38.8 percent of GDP in 2015; authorities committed to target of 35 percent of GDP by 2019.
- MEF’s Fiscal Report: overall government revenues and expenditures increased by 3.9 percent and 2.4 percent in 2015, respectively.
- Fund Technical Assistance (TA) is welcome to anchor the rule-based fiscal framework.

### Tax administration reforms and revenue measures
- New Directorate of General Revenues (DGI) strengthened tax cross-reference systems and eliminated loopholes used for tax evasion.
- Authorities deny intention to grant any future tax amnesty and prioritize consolidating tax payment culture.
- DGI received Fund TA in 2015 on tax administration, including institutional capacity building, governance, and assistance in the new e-tax system.
- CAPTAC assistance:
  - Establishing call-centers to facilitate tax consultation and payment.
  - Supporting customs authority to update software platform, procedures, and training.
- DGI implemented a new VAT withholding mechanism in coordination with large corporations to improve tax collection effectiveness in early 2016.
- Expected outcomes: enhanced budget controls, fiscal management, accountability, and strengthened public financial management performance.

### Financial sector stability and supervision
- Banking system remained stable, well capitalized and profitable.
- Total banking system assets: US$98.5 billion in 2015, increasing 9.5 percent compared to 2014.
- Banking capital adequacy (CAR): 15.2 percent in 2015 (same level as 2014), above the statutory 8 percent requirement.
- Return on assets (ROA): 1.4 percent in 2015.
- Return on equity (ROE): 13.4 percent in 2015.
- Private sector credit expanded 11.6 percent, mainly to commercial and household mortgages, personal consumption and construction activities.
- Non-performing loans (NPL): 1.3 percent in 2015, up from 1.1 percent the previous year (remained very low).
- SBP expects to further harmonize liquidity framework with Basel III standards by 2018.
- Supervisory coverage expanded to include leasing and factoring companies, financial cooperatives, fund-remittance companies and debit and credit card companies, as required by the new AML/CFT legislation.
- International cooperation strengthened with other supervisors in the region to enhance AML/CFT enforcement.
- 13 out of 30 correspondent bank services that terminated relations in the last two years have returned after Panama was removed from the FATF’s observation list earlier this year.

### AML/CFT, transparency, and international tax cooperation
- AML/CFT Action Plan agreed with FATF was fully completed in 2015; Paris Plenary removed Panama from the observation list in February 2016; FATF to reassess progress in 2017.
- Global Forum Peer Review approved Panama’s progress to Phase II regarding implementation of tax information exchange in October 2015.
- Panama has signed automatic exchange of information with the U.S. through FATCA.
- Double taxation agreement (DTA) concluded recently with Colombia.
- Panama engaged in negotiations of DTA with Germany and Japan, among others.
- Panama committed to implement automatic exchange of information on a bilateral basis under the Common Reporting Standards (CRS) of OECD by 2018; commitment reconfirmed by the Vice-President and Minister of Foreign Relations.
- Authorities emphasize need for global cooperation on AML/CFT regulations, exchange of information, mutual assistance, and accountability.

### Panama Papers aftermath, investigations, and institutional responses
- Leaked documents published by ICIJ contained around four decades of data related to offshore companies from one private legal firm in Panama; documents were obtained without authorization and publication followed an illegal act per the report.
- Panama’s Attorney General Office took control of all operations of the specific law firm; criminal investigation underway.
- Authorities state they do not allow, promote or support use of their financial platforms for illegal activities.
- Creation of common stock companies has been permitted in Panama since 1927; over 80 other jurisdictions allow similar corporate forms.
- Panama approved more than seven new laws in 2015, including:
  - Registry for common stock companies with an authorized custodian.
  - Criminalizing AML/CFT activities.
  - Creation of the Intendance of Supervision and Regulation of Non-Financial Activities (Intendance).
  - The AML/CFT law.
- Authorities assert Panama is not identified as a jurisdiction used as a recipient of deposits from illegal money.
- Authorities expressed concern that recurrent reference to “Panama Papers” in the staff report imposes a negative bias against Panama’s reputation and undermines government efforts to strengthen transparency.

### Government actions and coordination following OFAC press release
- OFAC issued a press release in May 2016 regarding the Waked Group and potential connection to money laundering activities.
- SBP took full control of the administration of Balboa Bank and Trust Company (BBTC) to prevent a potential bank run.
- Superintendency of Capital Markets (SMV) intervened and suspended operations of Balboa Securities Corporation.
- Intendance initiated immediate investigation and special supervision of companies included in the OFAC press release.
- Actions are supported by the new AML/CFT law, strengthening capacity to act in accordance with international standards.
- President Juan Carlos Varela established:
  - A Committee of Independent Experts to assess financial and corporate platforms and make recommendations; recommendations to be presented at the International Conference against Corruption in December 2016.
  - A Ministerial task group to coordinate actions with the U.S. Embassy in Panama, U.S. Treasury Department and Panamanian institutions.
- President emphasized importance of protecting more than 6,000 employees and their families directly affected by the investigations.

*International Monetary Fund staff report content unit _cr16337*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16337.pdf_