Panama: Staff Concluding Statement of the 2020 Article IV Mission

IMF News, February 19, 2020

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Canonical URL: Panama: Staff Concluding Statement of the 2020 Article IV Mission

IMF team led by Alejandro Santos visited Panama from February 4 through 17 to conduct the 2020 Article IV consultation discussions.
Meetings included the Minister of Economy and Finance Héctor Alexander, Banks Superintendent Amauri Castillo, other senior public officials, and private sector representatives.
Date of statement: February 19, 2020.

Growth and activity
- Real GDP grew by about 3 percent in the first three quarters of 2019 (y/y).
- 2019 growth is estimated at 3½ percent y/y, with a recovery beginning in the last quarter due to a new copper mine launching full-scale commercial production.
- Unemployment rate increased to 7.1 percent in August 2019 from 6 percent a year ago.
Inflation
- CPI inflation closed at -0.1 percent (y/y) in 2019 and averaged -0.4 percent in 2019.
Fiscal outcomes
- Overall deficit of the NFPS reached 3.1 percent of GDP in 2019 (compared to 3.2 percent of GDP in 2018).
- The fiscal deficit for 2019 was below the 3½ percent limit established in the revised social and fiscal responsibility law (SFRL).
- Payment of accumulated arrears in the amount of over 2 percent of GDP and pre-financing operations contributed to an increase in Central Administration debt to about 46 percent of GDP at end-2019 (close to 40 percent on a net basis).
External position
- Current account deficit narrowed to an estimated 6.6 percent of GDP in 2019 (from 8.2 percent of GDP in 2018), financed mainly by foreign direct investment.

Findings
- Fiscal consolidation envisaged under the amended fiscal rule appears appropriate: modified deficit ceiling to 3½ percent of GDP in 2019 with gradual adjustment to 2 percent of GDP by 2022.
- Recent rise in public debt driven by a relatively high deficit, pre-financing operations, and borrowing to pay accumulated arrears that were previously unrecorded.
Policy recommendations
- Conduct a thorough assessment of revenue potential and expenditure efficiency.
- Reform tax and customs administrations and review complex tax exemptions that significantly erode the tax base.
- Realign current spending with social needs, including investing more in education, and improve effectiveness of social spending.
- Carefully assess and prioritize capital projects, including those executed through newly-established PPPs.
- Gradually reform the pension system to better align incoming contributions with expected payouts amid shifting demographics.
- Enhance the fiscal framework and solidify commitment to sound fiscal policymaking by appointing members of the fiscal council to promote accountability and informed public debate.
- Consider adopting a structural rule over the medium term to build fiscal buffers for economic downturns and make fiscal policy less pro-cyclical.
- Strengthen budgetary execution rules to avoid recurrence of arrears and improve recording of fiscal accounts by limiting use of turnkey projects and deferred payment contracts in public investment projects.

Priority actions to exit FATF grey list
- Continue addressing deficiencies in Panama’s AML/CFT regulatory framework identified by the FATF.
- Update the national risk assessment and the AML/CFT strategy.
- Update the newly-created registry of beneficial ownership information for firms.
- Enforce legal action in cases of money laundering and unlicensed remittances.
- Increase public awareness of money laundering and suspicious financial activity.
- Maintain close cooperation and fluid communication with regional and international authorities to ensure a prompt exit from the grey list.
Tax transparency improvements
- Continue addressing shortcomings identified in the OECD Global Forum’s 2019 review.
- Dissolve dormant entities and respond to exchange-of-information requests in a timely manner.

Regulatory and macroprudential needs
- Continue progress toward adoption of Basel III.
- Focus on macroprudential policy and further upgrade the regulatory toolkit.
- Put in place an adequate liquidity support facility for banks and robust frameworks for crisis management, including enhanced resolution tools.
- Address data gaps on granular household and corporate balance sheets and property prices to better monitor macrofinancial risks.
Fintech and cybersecurity
- Develop cybersecurity and fintech regulatory frameworks in line with international standards.
- Capitalize on Panama’s digital and mobile connectivity to develop the fintech sector and potentially become a regional fintech hub.

Structural reforms needed to sustain high potential growth
- Improve productivity and competitiveness.
- Strengthen policies related to labor mobility, governance, and institutional capacity.
- Enhance innovation and technological sophistication in key industries.
- Upgrade workforce skill levels, streamline the insolvency framework, and improve the functioning of the judicial system.
- Enhance water management to support expanded Canal operations and a growing population given climate change risks.
Social policy priorities
- Reform social policies to maintain broad-based and inclusive growth, with strategic action in education (access and quality), gender equality, social protection programs, and poverty reduction in the comarcas.

Panama: Staff Concluding Statement of the 2020 Article IV Mission