Panama: Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission
IMF News, May 17, 2021
Source details
- Canonical URL
- Panama: Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission
Other formats
Bibliographic details
- Published: May 17, 2021
Mission, context, and policy priorities
- IMF team led by Alejandro Santos held virtual discussions with Panamanian authorities in the period April 19-30, 2021.
- Mission communicated on May 17, 2021.
- Panama requested and obtained a two-year Precautionary and Liquidity Line arrangement approved by the IMF Executive Board in January 2021 amounting to 500 percent of quota, equivalent to US$2.7 billion.
- Government priorities: protect lives and health via vaccination; sustain economic reopening; continue public policies supporting recovery; reinforce social reforms for sustainable and inclusive growth; adhere to the Social and Fiscal Responsibility Law to reinforce fiscal sustainability; analyze bank loan quality once moratoria expire to underpin credit exposures and capital buffers; strengthen AML/CFT to exit FATF grey list; improve national statistics to meet global standards.
2020 performance: headwinds from the pandemic (key findings)
- Real GDP contracted by 17.9 percent (y/y) in 2020 due to mobility restrictions.
- Unemployment rate rose from 7 percent in August 2019 to 18½ percent in September 2020.
- CPI inflation remained below zero in 2020; dropped as much as -2.5 percent (y/y) in May and closed the year at -1.6 percent (y/y).
- NFPS fiscal deficit rose from 3½ percent of GDP in 2019 to 10 percent of GDP in 2020.
- The amended Social Fiscal Responsibility Law (SFRL) sets deficit objectives to reach 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.
- 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), driven by a sharp contraction in imports, lower oil prices, increased copper exports, and resilient Canal revenues, leading to accumulation of international reserves.
2021 outlook and risks
- Projected growth: 12 percent in 2021 driven by recovery, vaccination rollout, full-scale copper production, recovery in private investment, and large carryover effects.
- Medium-term growth: expected to stabilize at potential growth rate of 5 percent.
- Inflation projections: ½ percent in 2021 and stabilize at 2 percent in the medium term.
- Current account: projected temporary deterioration to a deficit of about 3½ percent of GDP in 2021, then narrowing to 2½ percent of GDP over the medium term.
- Fiscal balance: NFPS deficit expected to narrow to 7½ percent of GDP in 2021 and to 1½ percent of GDP from 2025 onwards (in line with the amended fiscal rule).
- Balance of risks: tilted to the downside. Key downside risks include setbacks in global recovery from COVID-19 (including new strains), disruptions to global trade and capital flows, accelerating deglobalization affecting Canal and logistics activity, reputational damage from delayed exit from FATF grey list, cyberattacks disrupting digital infrastructure, and more frequent/severe climate-related natural disasters affecting Canal activity, agriculture, and tourism. Upside: pandemic could be curtailed faster than expected.
Fiscal framework and public financial management recommendations
- Reinforce fiscal sustainability by observing the modified fiscal rule that accommodates pandemic shocks while gradually withdrawing emergency COVID-related spending.
- Strengthen medium-term fiscal planning: make the medium-term fiscal framework an essential planning tool to facilitate compliance with the fiscal rule and deliver policy priorities (planned for the 2022 budget).
- Revenue-side measures: improve tax and customs administrations; assess revenue potential; review Panama’s tax expenditure, especially complex exemptions and preferences that erode the tax base; treat the tax amnesty as temporary to avoid weakening tax collection expectations.
- Expenditure-side measures: enhance public investment planning and budgeting; improve efficiency of public spending and realign with social needs; prioritize social spending such as health and education; consider gradual measures to secure pension system financial viability.
- Public financial management: adhere to comprehensive Action Plan to avoid arrears; refine publication of fiscal accounts adjusted by any uncovered arrears; improve budget execution and fiscal reports to show COVID-19 spending, publish audits, and reflect in-year reallocations.
Financial integrity and tax transparency
- Exiting FATF grey list is a priority. Remaining AML/CFT action items include:
- Strengthening understanding of ML/TF risk in the corporate sector and implementing policies to mitigate that risk.
- Improving oversight and sanctions for AML/CFT-related violations.
- Ensuring verification of up-to-date beneficial ownership information for legal entities.
- Demonstrating progress in ML criminal investigations involving foreign tax crimes.
- EU kept Panama on the blacklist of non-cooperative jurisdictions for tax purposes in February 2021; authorities encouraged to work closely with EU authorities to resolve this issue.
Financial sector oversight, forbearance, and resilience
- Forbearance measures: moratorium on loans ran until December 31, 2020, with an extended period for loan modification through June 30, 2021.
- Superintendency of Banks of Panama (SBP) advised banks to increase provisioning beyond normal-time levels and may re-assess adequacy ahead of moratorium expiry.
- Recommendations on forbearance: restrict regulatory forbearance to stipulated categories and a specific timeframe; closely monitor and adopt a supervisory action plan.
- Conduct a risk-focused examination of banks’ loan portfolios, including assessment of fundamental asset quality once the pandemic recedes, to ascertain credit quality and adequacy of capital buffers.
- Medium-term financial stability measures: formalize a crisis management plan; implement capital conservation buffers; introduce additional capital requirements for systemically important banks; enhance macroprudential toolkit to address real estate sector risks and household indebtedness.
- Capital markets: advance development of domestic capital markets to diversify financing sources; establish a roadmap with clear industry vision, infrastructure improvements (custody, clearing, trading), and market oversight and supervisory capacity.
Structural reforms and social priorities
- Structural measures to enhance competitiveness and growth potential: improve business climate; strengthen labor mobility policies; improve governance and institutional capacity; enhance innovation and technological sophistication in key industries; deepen financial inclusion through targeted measures; upgrade workforce skills; streamline insolvency framework; improve judicial system functioning.
- Social priorities to address pandemic-widened gaps: enhance quality of social spending (notably education); prioritize fiscally-sustainable strategies to reduce inequality; improve living conditions in the comarcas (areas inhabited by indigenous populations); enhance women’s economic opportunities.
Data and statistical improvements
- Improve timeliness, periodicity, and coverage of data categories in line with Special Data Dissemination Standard (SDDS) requirements.
- Strengthen the National Statistical Council to foster coordination among data producers and users.
Operational closing note
- The mission thanked the Panamanian authorities for excellent cooperation and candid discussions.
Source: Panama: Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission (May 17, 2021).