IMF Executive Board Concludes 2020 Article IV Consultation with Panama

IMF News, March 26, 2020

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Published: March 26, 2020

Scope and context

Staff Report prepared for Executive Board consideration on March 24, 2020; reflects discussions with Panamanian authorities during February 4–17, 2020 and is based on information available as of February 21, 2020.
Report focuses on Panama’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic; it does not reflect the implications of those subsequent developments.
The outbreak has greatly amplified uncertainty and downside risks around the outlook; staff is closely monitoring the situation and will continue to assess its impact and related policy response in Panama and globally.
The Executive Board concluded the Article IV consultation on March 24, 2020 and considered and endorsed the staff appraisal without a meeting.

Recent economic developments (as described in the report)

After a decade of high growth, the economy slowed in 2018–19 and growth is estimated to have reached 3.0 percent in 2019.
Inflation slid below zero for most of 2019 due to soft demand; consumer price index (average) in 2019 was -0.4.
Credit growth decelerated; total unemployment rate rose slightly to 7.1 percent in August 2019, compared to 6.0 percent the previous year.
Copper exports helped narrow the external current account deficit to 5.2 percent of GDP.
Confronted with a sharp revenue shortfall in mid-2019, the government revised the fiscal rule widening the deficit ceiling of the non-financial public sector to 3.5 percent of GDP (from 2.0 percent in 2018), with gradual adjustments in subsequent years.
Fiscal deficit amounted to 3.1 percent of GDP in 2019; uncovering of previously unrecorded arrears of over 2 percent of GDP increased central government debt to 46.2 percent of GDP.
Panama was placed on the FATF grey list in June 2019; limited impact on the economy and banking system thus far; government initiated reforms to address remaining AML/CFT deficiencies.
For 2020, the deficit will likely surpass the limit under the fiscal rule of 2.75 percent of GDP as there will be a need to support the economy and increase public health spending in view of COVID-19.

Executive Board assessment — key findings and risks

Growth
- Growth is expected to rebound in 2020. Economic activity is projected to recover after a slowdown in 2018-19, supported by full-scale copper production and robust private investment.
- Growth over the medium-term is expected to remain at its potential.
- Key risks: setbacks in exiting the FATF grey list; complying with SFRL deficit ceilings; slowdown in Canal traffic amid escalating trade tensions; weak growth in key trade partner countries; the coronavirus outbreak.
- External imbalances expected to decline over the medium-term, but the external position is moderately weaker than fundamentals and desirable policy settings.
Fiscal policy and public debt
- Sustained fiscal discipline is required for fiscal policy credibility and to keep public debt on a downward trajectory.
- Central Administration debt reached 46.2 percent of GDP in 2019 amid a relatively high deficit exacerbated by newly discovered unrecorded arrears.
- The modified gradual adjustment of the deficit ceiling under the SFRL is appropriate to smooth the pace of necessary fiscal consolidation.
- Authorities should consider using a “shadow” structural rule in the future to build fiscal buffers.
Revenue, expenditure, and pensions
- A realignment of fiscal revenue and expenditures is imperative to sustain growth.
- Improve capacity of tax and customs administrations; review Panama’s complex tax exemptions that erode the tax base.
- On expenditure: realign current spending with social needs—including by investing more in education—and improve effectiveness of social spending.
- Capital projects need careful assessment and prioritization.
- Pension system needs strengthening: gradually align pension contributions with expected payouts; recommend a slow-paced approach given political sensitivity.
Fiscal framework and arrears
- Strengthening the fiscal framework is essential: address sizable unrecorded arrears by strengthening budgetary execution rules and misuse penalties and streamline recording of fiscal accounts.
- Limit use of turnkey projects and deferred payment contracts in public investment projects.
AML/CFT and tax transparency
- Exiting the FATF grey list must remain a priority; continue addressing deficiencies in AML/CFT regime and legal framework identified by the FATF.
- Address shortcomings identified in the 2019 Global Forum review on global tax transparency, including timely responses to exchange-of-information requests.
Financial sector and regulation
- Financial sector remains robust, but macrofinancial risks warrant continued monitoring.
- Address data gaps on household and corporate balance sheets and property prices; improve housing price indices.
- Align prudential regulations with Basel III; focus on macroprudential tools and upgrade regulatory toolkit.
- Establish robust frameworks for crisis management, including adequate liquidity support for banks and enhancing resolution tools for failed banks.
Fintech and digital potential
- Fintech sector holds potential with an appropriate regulatory framework: adopt cybersecurity and fintech regulatory frameworks; capitalize on Panama’s digital and mobile connectivity to enhance financial inclusion and lower intermediation costs.
Structural reforms and inclusiveness
- Reinforce structural reform agenda to maintain high potential growth: improve productivity and competitiveness, labor mobility, governance and institutional capacity, and innovation and technological sophistication.
- Upgrade workforce skill levels, streamline insolvency framework, and improve judicial system functioning.
- Address social inequities urgently: revamp social policies in education, gender equality, social protection programs, and poverty reduction in the comarcas.
Climate and natural resources
- Panama’s climate change mitigation strategy and commitments are welcome.
- Beyond green energy provision, authorities should be mindful of natural resource preservation given susceptibility to extreme weather events.
- Pressure for better water management is mounting from expanded Canal operations and a growing population.

Selected indicators and projections (as presented)

Table 1. Panama: Selected Economic and Social Indicators
- Population (millions, 2018) 4.2
- Poverty line (percent, 2017) 20.7
- Population growth rate (percent, 2018) 1.6
- Life expectancy at birth (years, 2017) 78.1
- Total unemployment rate (August, 2019) 7.1
- Adult literacy rate (percent, 2018) 95.4
- GDP per capita (US$, 2018) 15,507
- IMF Quota (SDR, million) 376.8
Selected historical and projected macro aggregates (percent change unless noted)
- Real GDP (2007 prices)
- 2016 5.0
- 2017 5.6
- 2018 3.7
- 2019 3.0
- 2020 4.0 (projection)
- Consumer price index (average)
- 2016 0.7
- 2017 0.9
- 2018 0.8
- 2019 -0.4
- 2020 0.5 (projection)
- 2021 1.5 (projection)
- Consumer price index (end-of-year)
- 2016 0.2
- 2017 -0.1
- 2018 1.0
- 2019 2.0
- Output gap (% of potential)
- 2016 0.3
- 2017 -0.7
- 2018 -0.9
- Public consumption growth rates
- 2016 10.1
- 2017 6.5
- 2018 7.5
- 2019 8.7
- 2020 2.1 (projection)
- 2021 5.7 (projection)
- Private consumption
- 2016 7.1
- 2017 3.1
- 2018 2.3
- 2019 3.2
- Public investment 1/
- 2016 49.0
- 2017 -20.7
- 2018 7.0
- 2019 -5.2
- 2020 1.1 (projection)
- 2021 5.8 (projection)
- Private investment
- 2016 -5.5
- 2017 14.9
- 2018 -3.7
- 2019 6.1
- Imports and exports (selected)
- Exports 2016 -4.3; 2017 -0.3; 2018 7.2; 2019 (not listed)
- Imports 2016 -4.8; 2017 4.7; 2018 2.8; 2019 -2.7; 2020 7.3 (projection)
- Financial sector
- Private sector credit 2016 8.4; 2017 4.5; 2018 4.6; 2019 6.6
- Broad money 2016 4.1; 2017 5.2
- Average deposit rate (1-year) 2016 2.7; 2017 3.5; 2018 3.9
- Average lending rate (1-year) 2016 4.3
- Savings-investment balance (In percent of GDP)
- Gross domestic investment: 2016 40.5; 2017 41.7; 2018 41.3; 2019 38.4; 2020 38.6; 2021 38.2
- Public sector (share of GDI): 2016 7.8; 2017 5.9
- Private sector (share of GDI): 2016 32.7; 2017 35.8; 2018 35.2; 2019 33.2; 2020 33.6
- Gross national saving: 2016 33.1; 2017 32.0; 2018 31.9
- Public finances 1/
- Revenue and grants: 2016 22.6; 2017 22.0; 2018 21.9; 2019 20.8; 2020 20.4; 2021 20.7
- Expenditure: 2016 24.8; 2017 24.2; 2018 23.4; 2019 22.8
- Current, including interest: 2016 16.7; 2017 17.0; 2018 17.1; 2019 17.8; 2020 17.5
- Capital: 2016 8.0; 2017 6.9; 2018 5.3; 2019 (not listed)
- Overall balance, including ACP: 2016 -2.2; 2017 -2.9; 2018 -2.6; 2019 -2.4; 2020 -2.1
- Overall balance, excluding ACP: 2016 -2.0; 2017 -3.2; 2018 -3.1; 2019 -2.5
- Total public debt (Debt of the Non-financial public sector 2/)
- 2016 34.8
- 2017 36.8
- 2018 41.0
- 2019 42.1
- External and domestic debt shares (percent of GDP)
- External: 2016 28.5; 2017 28.7; 2018 30.5; 2019 34.9; 2020 35.3; 2021 34.7
- Domestic: 2016 6.3; 2017 6.2; 2018 6.8; 2019 7.4
- Debt of ACP: 2016 4.4; 2017 3.6
- Other 3/: 2016 3.8; 2017 3.4
- External sector
- Current account: 2016 -7.8; 2017 -5.9; 2018 -8.2; 2019 -6.1
- Net foreign direct investment inflows: 2016 7.9; 2017 5.1
- External debt: 2016 159.9; 2017 149.6; 2018 151.8; 2019 156.5; 2020 160.2; 2021 160.0
- Memorandum item
- GDP (in millions of US$): 2016 57,908; 2017 62,219; 2018 65,128; 2019 66,801; 2020 69,850; 2021 74,443

1/ Includes Panama Canal Authority (ACP). Includes Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18. 2/ Non-Financial Public Sector according to the definition in Law 31 of 2011. 3/ Includes debt of public enterprises outside the national definition of NFPS (ENA, ETESA, and AITSA) and non-consolidated agencies.

Source: IMF Communications Department press release, March 26, 2020.