Panama: Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission

May 17, 2021

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.

Washington, DC: An International Monetary Fund team led by Alejandro Santos held virtual discussions with the Panamanian authorities in the context of the 2021 Article IV consultation in the period April 19-30, 2021. The team met with the Minister of Economy and Finance Hector Alexander, Banks Superintendent Amauri Castillo, as well as other senior public officials and private sector representatives.

Panama’s economy experienced a pronounced contraction as output fell by 17.9 percent in 2020 amid stringent containment measures and mobility restrictions to tackle the COVID-19 pandemic. A rebound in the global economy and supportive macroeconomic policies, have helped underpin a recovery in Panama. The outlook for 2021 is optimistic although the continuing global uncertainty, particularly from the emergence of new COVID-19 strains, could tilt the balance of risks to the downside. As an insurance against these potential extreme external shocks, Panama requested a two-year Precautionary and Liquidity Line arrangement, which was approved by the IMF Executive Board in January 2021, amounting to 500 percent of quota, equivalent to US$2.7 billion. The government’s priority is to protect lives and health of its people through a vaccination program that facilitates the sustainability of the economic reopening and to provide continuity to the public policies that would support the economic recovery and reinforce social reforms to ensure sustainable and inclusive growth. As the recovery gathers pace, it is important to reinforce fiscal sustainability by adhering to the Social and Fiscal Responsibility Law. To fortify financial stability, a detailed analysis of the quality of banks’ loans, once the moratorium expires, would help underpin banks’ credit exposures and capital buffers. The authorities remain firmly committed to exiting the FATF grey list by strengthening the AML/CFT regime to enhance Panama’s position as a regional financial center. Finally, further improvements to the national statistics will ensure adherence to global standards in data quality and dissemination.

Headwinds from the pandemic had led to a sharp economic contraction in 2020

  • Pronounced output fall . After several decades of economic dynamism, real GDP contracted by 17.9 percent (y/y) in 2020 due to mobility restrictions to contain the pandemic. Following the slump in the second quarter, the economy recovered vigorously in the second half of 2020 but not enough to compensate for the fall in the first half. The unemployment rate more than doubled from 7 percent in August 2019 to 18½ percent in September 2020.
  • Subzero inflation . CPI inflation remained persistently below zero in 2020, reflecting weak demand. After dropping by as much as -2.5 percent (y/y) in May, inflation closed the year at -1.6 percent (y/y).
  • Widened fiscal deficit . The NFPS fiscal deficit rose from 3½ percent of GDP in 2019 to 10 percent of GDP in 2020 due to the operation of automatic stabilizers as GDP fell sharply, while COVID-19 related spending was broadly offset by cuts in other expenditure. The 2020 fiscal outcome was in line with the amended Social Fiscal Responsibility Law (SFRL) which sets deficit objectives on a gradual fiscal consolidation path until the NFPS deficit reaches 1½ percent of GDP from 2025 onwards. Public-sector debt rose from 42¼ percent of GDP in 2019 to 64 percent of GDP in 2020 due to a sharp fall in GDP and an absolute increase in the public debt.
  • Improved external position . The current account balance switched to a surplus of about 2¼ percent of GDP in 2020 (from a deficit of 5 percent of GDP in 2019) on the back of a sharp contraction in imports, lower oil prices, increased copper exports and resilient Canal revenues. The current account surplus together with other capital inflows led to an accumulation of international reserves.

Tailwinds from the global recovery fuels optimism for 2021, but downside risks remain

  • Sharp economic recovery underway. The economy is projected to grow 12 percent in 2021 as economic activities recover, boosted by the vaccination rollout and full-scale copper production, a recovery in private investment, and a large carryover effect. Over the medium term, growth is expected to stabilize at its potential growth rate of 5 percent. Inflation is expected to pick up to ½ percent in 2021 amid accelerating economic activity and stabilize at 2 percent in the medium term. Meanwhile, the external position is projected to deteriorate temporarily in 2021 to a current account deficit of about 3½ percent of GDP amid pent-up demand for imported durable goods, followed by stronger export receipts in the medium term, reducing the current account deficit to 2½ percent of GDP over the medium term. The fiscal balance is expected to gradually improve—in line with the amended fiscal rule—with the NFPS deficit narrowing to 7½ percent of GDP in 2021 and to 1½ percent from 2025 onwards.


  • Balance of risks tilted to the downside. Key risks to growth are related to setbacks in the global recovery from the COVID-19 pandemic, which could lead to disruptions in global trade and capital flows, accelerating deglobalization, negatively impacting the activity of the Canal and logistics sectors. Domestic risks include a lack of progress on exiting rapidly the FATF grey list which may expose Panama to reputational damage. In addition, cyberattacks could disrupt digital infrastructure, while more frequent and severe climate-change related natural disasters could adversely affect Canal activity, agriculture, and tourism. On the upside, the pandemic could be curtailed faster than expected.


    Observance of the fiscal rule will ensure debt sustainability

    • The envisaged post-pandemic fiscal consolidation effort should be accompanied by a strengthening medium-term fiscal planning . The modified fiscal rule accommodates the pandemic shock by allowing the operation of automatic stabilizers while providing the necessary flexibility to gradually withdraw the emergency COVID related spending. Cyclical factors will facilitate the fiscal consolidation beyond 2021, but further improvements in tax administration and expenditure prioritization may be needed. The medium-term fiscal framework should become an essential planning tool to facilitate compliance with the fiscal rule and deliver the government’s policy priorities (already planned for the 2022 budget).
    • An assessment of the revenue potential and expenditure efficiency would be welcomed . Measures to improve tax and customs administrations, enhancing public investment planning and budgeting, improving the efficiency of public spending and realigning it with social needs are important to sustain growth amid revenue shortfalls. Moreover, a review of Panama’s tax expenditure would be welcomed, particularly its complex exemptions and preferences system that continually erode the tax base. On the expenditure side, social priorities such as health and education should be given prominence in resource allocation, while other spending growth should be contained. Meanwhile, the pension system may need gradual measures to cement its financial viability. The tax amnesty, while justifiable in the pandemic environment, should be emphasized as a temporary program to contain public expectations of future tax amnesties that could weaken tax collection.
    • There is significant room for improving the public financial management framework. The authorities have made a considerable effort to strengthen public financial management to avoid future domestic arrears accumulation. The authorities should adhere to their comprehensive Action Plan while refining the publication of the fiscal accounts adjusted by any uncovered arrears. While publication of procurement information has improved significantly, budget execution and fiscal reports should facilitate information on COVID-19 spending, publish audits, and reflect in-year reallocations of resources towards this area.

    Improvements to the financial integrity framework should continue

    • Exiting the FATF grey list must remain a priority. With the original timelines for addressing the items on the Financial Action Task Force (FATF) Action Plan now passed, the authorities need to expediently address the remaining deficiencies in Panama’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulatory framework identified by the FATF. Specifically, remaining action items include strengthening the understanding of the risk of money laundering and terrorist financing (ML/TF) of the corporate sector and implement the respective policies to mitigate the risk; improve oversight and sanctions for AML/CFT-related violations; ensure the verification of up-to-date information on beneficial owners of legal entities and continue to demonstrate progress in ML criminal investigations involving foreign tax crimes.
    • Efforts to further enhance tax transparency should continue. Despite efforts to comply with international standards on transparency, the European Union (EU) kept Panama on the blacklist of non-cooperative jurisdictions for tax purposes in February 2021. The authorities are encouraged to work closely with the EU authorities to resolve this issue.

    Intensifying financial sector oversight and additional measures will bolster resilience

    • Restricting and phasing out forbearance is necessary as the pandemic recedes . To provide relief to borrowers affected by the pandemic, the authorities established a moratorium on loans until December 31, 2020, and allowed an extended period for loan modification through June 30, 2021. Considering the elevated credit risk from restructured exposures, the Superintendency of Banks of Panama (SBP) has advised banks to increase their provisioning beyond the level required during normal times and may re-assess the adequacy of such provisions ahead of the expiry of the moratorium. Any regulatory forbearance of this nature should be restricted to the stipulated categories and a specific timeframe should be adopted for phasing it out, with close monitoring and a supervisory action plan. Given the large share of modified loans arising from the moratorium, a risk-focused examination of banks’ loan portfolio, including an assessment of fundamental asset quality, once the pandemic recedes would help ascertain banks’ credit quality and the adequacy of their capital buffers.
    • Over the medium term, there is a need to upgrade the regulatory framework, enhance macroprudential tools, and develop capital markets. As the current sanitary emergency is resolved, there will be a need to fortify financial stability by formalizing a crisis management plan, implementing capital conservation buffers, introducing additional capital requirements for systemically important banks, and enhancing the macroprudential policy toolkit with a view to guard against risks in the real estate sector and to bank clients’ indebtedness. At the same time, advancing the development of the domestic capital market would enhance the sources of financing and prospects for higher and more inclusive growth. Establishing a roadmap, which identifies clear vision for the industry, improvements in infrastructure (custody, clearing, and trading), and market oversight and regulatory supervisory capacity would foster the development of Panama’s capital markets to help meet the needs of the government and various domestic agents.

    Addressing structural needs and social priorities is vital

    • Implementation of structural measures will be key to enhancing competitiveness and growth potential. Raising productivity and returning to high rates of growth will require continued improvements in Panama’s business climate, a strengthening of policies related to labor mobility, governance and institutional capacity, enhancing the innovation and technological sophistication in key industries, and deepening financial inclusion through more targeted measures. To remain an attractive destination for doing business, Panama needs to upgrade the skill level of its workforce, streamline the insolvency framework and improve the functioning of the judicial system.
    • Closing socioeconomic gaps widened by the pandemic will require decisive policy action. To achieve the government’s long-term goals, consideration should be given to enhancing the quality of social spending, most notably education spending, and prioritizing country-appropriate and fiscally-sustainable strategies to reduce inequality, improve the living conditions in the comarcas (areas inhabited by indigenous populations), and enhance women’s economic opportunities.
    • Improving data dissemination practices will enhance Panama’s data transparency . Improving the timeliness, periodicity and coverage of a few data categories in line with the Special Data Dissemination Standard (SDDS) requirements will support better surveillance and benefit data users. The planned strengthening of the National Statistical Council will foster coordination among data producers and data users.

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

IMF Communications Department

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