Panama: Staff Concluding Statement of the 2018 Article IV Mission

October 3, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund team led by Alejandro Santos visited Panama from September 24-October 3 to conduct the discussions for the 2018 Article IV consultation. The team met with the Minister of Economy and Finance Eyda Varela de Chinchilla, Banks Superintendent Ricardo Fernandez, as well as other senior public officials and private sector representatives.

Despite temporarily slowing in 2018, the economy is poised for a rebound in the near term and will remain among the most dynamic in Latin America. The outlook is positive, albeit set against heightened downside risks. Policies should aim at maintaining the conditions for sustained growth by preserving Panama’s competitive advantage as an attractive destination for business. Strengthening AML/CFT oversight and enhancing tax transparency and information exchange will be important to cement Panama’s position as a regional financial center. It will also be important to preserve fiscal discipline as this is the main macroeconomic stabilization instrument and to reinforce the fiscal framework with the establishment of a fiscal council. Given the importance of the financial system in the Panamanian economy, the authorities should continue to bolster systemic risk assessment, risk-based supervision and put in place robust frameworks for macroprudential policy and crisis management.

The economy has slowed down temporarily but fundamentals remain strong.

  • Weaker activity . High frequency data indicate that economic activity has softened, with growth estimated at 3.7 percent in H1-2018 (compared to 5.4 percent in 2017), reflecting a sharp slowing down in key sectors including construction, which was affected by a prolonged strike in April/May. The unemployment rate increased marginally to 5.8 percent in March 2018 from a year ago, reflecting less dynamic activity.

  • Tamed inflation . Inflation remains low and stable at around 1 percent (y/y) in August 2018 (compared to 0.5 percent in December 2017), despite supply shocks that have increased food and fuel prices.

  • Fiscal discipline . The overall deficit of the NFPS reached 1.6 percent of GDP in H1-2018 (compared to deficit of 0.2 percent of GDP in the first half of 2017), due to an underperforming tax revenue and a strong growth in current and capital expenditures to support the economic weakening.

  • Stable external position . The current account deficit remained at 8 percent of GDP in 2017 and it has deteriorated further in the first half of 2018 as international oil prices have rebounded. However, the current account deficit remains mostly covered by foreign direct investment.

The outlook is positive but the balance of risks is to the downside

  • Panama will remain among the most dynamic economies in Latin America. The mission will finalize its revised growth projections for 2018-19 in the coming weeks, and stressed that the balance of risks to the current forecast (i.e., 4.6 percent for 2018 and 6.8 percent for 2019) is to the downside. In any case, and despite the recent slowdown, the revised growth forecast will remain above 4 percent in 2018, and it will continue to be above 6 percent in 2019, supported by a recovery in construction, transport, logistics and exports from a new copper mine. Over the medium-term, growth is expected to moderate to its potential of 5½ percent. Inflation will remain subdued to about 2 percent. External imbalances are expected to continue declining and to remain broadly consistent with fundamentals. The fiscal position will remain stable, with the overall deficit of the NFPS projected at about 1½ percent over the medium term, keeping public debt on a declining path.

  • Risks are elevated and tilted to the downside. A key domestic risk is failure to demonstrate progress in addressing outstanding FATF recommendations, notably criminalization of tax evasion ahead of the next FATF Plenary in February 2019 and advancing tax transparency initiatives, which could expose Panama to reputational damage, among other consequences. Continued oversupply in the domestic property markets could impact financial stability and the real economy. Panama also faces heighten external risks. A weaker-than-expected global growth and escalating trade tensions in advanced economies, could dampen exports and government revenue. A sharp tightening of global financial conditions, and a stronger US dollar would erode Panama’s competitiveness.

Financial integrity and tax transparency should continue to be strengthened.

  • Effective implementation of the AML/CFT framework must remain a priority . Building on the recent positive assessment by GAFILAT, the authorities should continue strengthening supervisory capacity for AML/CFT oversight. Further development of risk-based approaches to AML supervision will be essential to effectively channel available resources to critical areas. Enhancing the understanding of AML/CFT risks to which Panama is exposed, particularly in the highly vulnerable sectors will help map out strategies to mitigate AML/CFT risks. Outstanding gaps in the legal framework should be addressed to fully align it with international standards. Making tax crimes a predicate offense to money laundering by approving the draft legislation under consideration without further delay and ensuring the availability of beneficial ownership and accounting records of Panamanian entities are important to avoid being listed as a non-cooperative jurisdiction, and thereby eroding the recent gains. Continued efforts to sensitize the international community on progress with financial integrity is paramount.

  • Efforts to further enhance tax transparency and information exchange should continue . Actions being taken to share tax information more widely and promptly under the OECD’s common reporting standard and the Multilateral Competent Authority Agreement should continue. Going forward, the priority should be to further advance the implementation of tax transparency initiatives towards a successful Global Forum’s forthcoming assessment against enhanced standards. In addition, the authorities are also encouraged to implement the minimum standards on Base Erosion and Profit Shifting (BEPS), in line with Panama commitments as a member of the OECD/G20’s Inclusive Framework on BEPS.

The fiscal framework needs additional strengthening to sustain budgetary discipline.

  • A simplified fiscal rule will improve transparency . To this end, the authorities recently sent legislation to the National Assembly to modify the SFRL improving transparency. The new SFRL establishes a ceiling on the headline deficit of the NFPS of 2 percent of GDP in 2018, 1¾ percent in 2019-20, and 1½ percent of GDP after 2020, with the target over the medium-term broadly consistent with the current limit under the law. If approved this year, the new legislation will allow for a higher fiscal deficit by ½ of GDP for 2018 (compared with the current SFRL), which would be appropriate given the weakening activity. In the event this legislation is not approved, the fiscal stance would be broadly neutral for 2018. In any case, the track-record of fiscal discipline ensures debt sustainability.

  • Measures to further reinforce the fiscal framework should be adopted . The proposal to establish a fiscal council will further promote accountability and help nurture informed public debate on fiscal policy. The authorities submitted legislation to this effect in 2017.

  • Continued and sustained progress to strengthen revenue administration is needed . Governance and institutional capacity of the custom administration needs to urgently improve, along several dimensions, namely, human resources, ad hoc exemptions, control processes, and data collection and management. In addition to initiatives to modernize tax administration, strong action is also needed to publish a list of estimated foregone revenues due to tax incentives and exemptions to help initiate public debate to review these complex schemes that continually erode Panama’s tax base.

Financial sector reforms are required to build resilience.

  • Systemic risk oversight should be strengthened to build financial resilience and guard against macro-financial feedback loops . Addressing data gaps with respect to household and corporate balance sheets and property prices remains a top priority. Coordination on the assessment of systemic risk across financial sector supervisors and with the Ministry of Finance should also be enhanced through the Financial Coordination Council (CCF). An institutional framework for macroprudential policy and tools should be developed to provide more policy flexibility in addressing macrofinancial risks.

  • The alignment of prudential regulations with Basel III should continue . With the regulatory framework now broadly aligned to Basel III, the priority should shift to a strengthening of risk-based supervision of both banks and non-banks. It will also be important to put in place a robust framework for crisis management, including adequate liquidity support for banks and deposit insurance, and to strengthen the bank resolution framework by enhancing the range of resolution tools available to facilitate the timely resolution of troubled banks. FinTech has the potential to transform Panama’s regional banking sector, with close supervision and adequate regulation of developments needed to nurture the benefits while preserving financial stability


The mission would like to thank the Panamanian authorities for their excellent cooperation, kind hospitality, and candid and open discussions.

IMF Communications Department

PRESS OFFICER: Raphael Anspach

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