Panama: Staff Concluding Statement of the 2024 Article IV Mission

March 4, 2024

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: In the two decades preceding the pandemic, Panama advanced in income convergence, with Panama’s income ratio to the US increasing from thirty-three to forty-eight percent. Rapid growth was driven by an unprecedented construction and investment boom that included major construction projects, such as the enlargement of the Panama Canal and the Tocumen airport, and the expansion of the services and logistics sectors that benefited from those projects. From the supply side, convergence was in large part supported by a sharp increase in the employment to population rate. This was the result of a demographic transition, an increase in female labor force participation, and a significant drop in unemployment.

Panama was hit hard by the pandemic, but the economic recovery has been strong. In 2023, GDP grew by 7.5 percent, exceeding expectations for the third year in a row. A drought has led to a reduction in the daily number of ships going through the Panama Canal, but the impact on revenues of the Panama Canal Authority (ACP) has been limited so far. Unemployment, which had surged from 7.1 percent in 2019 to 18½ percent in 2020, declined to 7.4 percent in August 2023. Average inflation declined from 2.9 percent in 2022 to 1.5 percent in 2023 and remained well below other countries in the region.

In late 2023, after Panama’s Supreme Court ruled that the new mining contract with copper mine operator Minera was unconstitutional, the government announced its intention to close the mine. The ruling followed months of widespread social protests, which had a significant impact on economic activity in the fourth quarter of last year. 

As a result of the closing of the mine, GDP growth is projected to decline to 2.5 percent in 2024, before gradually improving over the medium term. The slowdown is not expected to be broad-based, but reflects the closing of Minera, which contributed, directly and indirectly, about 5 percent of Panama’s GDP. The closing of the mine also entails the permanent loss of about 0.6 percent of GDP in fiscal revenues and 7.5 percent of exports of goods and services. Inflation is projected to remain low at 2.2 percent (y/y) by end-2024 and about 2 percent in coming years. Over the medium-term, GDP is expected to grow by 4 percent, while the current account deficit is projected to range around 2 percent of GDP.

The near-term economic outlook is subject to a large degree of uncertainty and the balance of risks is tilted to the downside. Downside risks include the loss of investment grade status (due to concerns over Panama’s fiscal situation), which would raise Panama’s external borrowing costs and increase refinancing risks. Downside risks also include renewed social unrest and further fallout from the closing of Minera. A longer-than-expected drought could reduce the ACP’s revenues and its contributions to the government. Over the medium-term, claims from the mine arbitration pose a significant risk to the public finances.

Preserving Fiscal Sustainability

Since the height of the pandemic, there has been significant fiscal consolidation. The non-financial public sector (NFPS) overall fiscal deficit declined from 10.2 percent of GDP in 2020 to 4.0 percent of GDP in 2022. It was further reduced to 3.0 percent of GDP in 2023, in line with the SFRL. The reduction in the deficit-to-GDP ratio was the result of higher revenues, including payments by copper mine Minera and the sale of land to the ACP, and lower public investment. Interest payments went up sharply.

In 2024, the government aims to further reduce the fiscal deficit to 2.0 percent of GDP. However, the 2024 budget authorizes an increase in spending of 3 percentage points of GDP compared to the 2023 outcome, with the bulk of the increase going to higher investment, interest payments, and a mandated increase in education spending. Moreover, the budget assumes that the ratio of central government revenue to GDP will increase, even though the payments by Minera and the sale of land to the ACP will not be repeated in 2024. To meet the target, the government aims to under-execute public investment.

To meet the fiscal deficit target, staff estimates that public investment would need to be compressed to 2 percent of GDP, from 4¾ percent of GDP in 2023 and 6½ percent of GDP in the 2024 budget. Such a large compression may prove infeasible. It would also not be desirable in a year when the closing of the mine will lead to an increase in unemployment. Moreover, curtailing public investment would not provide a sustainable solution to preserve fiscal sustainability.

A more moderate reduction in public investment to 4 percent of GDP would be preferable, even if this would lead to a higher deficit in 2024 on a transitory basis. Staff assesses that a fiscal deficit of 4 percent of GDP in 2024 would be adequate from a cyclical perspective, allowing a more gradual adjustment to the permanent loss of fiscal revenue from Minera.

The SFRL goal of reducing the fiscal deficit over time to 1.5 percent of GDP remains appropriate. If the deficit stays around 4 percent of GDP in coming years, there would be no further decline in the debt ratio, leaving the public finances vulnerable to renewed shocks. Moreover, financing costs would likely increase, further jeopardizing debt dynamics. 

To ensure that public debt is on a firm downward trend, the public finances plan for 2025-29 to be developed in the fall should contain a credible multi-year fiscal consolidation plan to reduce the deficit to the SFRL target of 1.5 percent of GDP by 2027. This plan should be anchored by explicit multi-annual revenue forecasts and expenditure limits consistent with the deficit target and include identified measures to ensure that the revenue forecasts and expenditure limits will be met.

Boosting fiscal revenues would reduce the need to cut public investment. The central government tax revenue-to-GDP ratio is low at only 7.7 percent in 2023. Tax revenues are low due to low tax rates (such as Panama’s ITBMS (VAT) rate of 7 percent), numerous exemptions, high tax expenditures, and weak tax collection efficiency. Low tax revenues are partly compensated by non-tax revenues (mainly contributions from the ACP), but total general government revenue is relatively low as well.

Improving tax and customs collection efficiency will help. The Internal Revenue Directorate (DGI) and Customs Administration (ANA) undertook modernization reforms, including the improvement of data gathering processes for personal income tax collection; the adoption of the electronic invoice; the creation of a data analysis unit to improve cross-checking of data and detect tax non-compliance; the launch of a new Large Taxpayers Unit; and new, state-of-the-art, scanners at customs checkpoints. To continue the modernization, a comprehensive risk management framework should be adopted. It is also necessary to increase the autonomy and resources of ANA, including to overcome limitations in managing its own budget and HR policy.

There is also scope for broadening the tax base. Broadening the tax base could be achieved by reducing exemptions, deductions, and tax expenditures. Many of these exemptions are regressive—they mainly benefit higher income levels. More specifically, the mission suggests that the government rationalizes tax exemptions by (i) streamlining ITBMS tax exemptions and the process for refunds; (ii) reviewing exemptions and deductions from the personal income tax; and (iii) reviewing tax incentives for the corporate income tax.

Tax rates may need to increase as well. The government could consider increasing the ITBMS (VAT) rate. Additionally, adjusting cigarette and fuel excises to account for the externalities they generate is also a viable option. Adopting a minimum corporate income tax for companies that pay taxes in the countries where they are headquartered (in response to the introduction of an international minimum tax) could also enhance revenue generation.

Action must also be taken to address the deficit in the defined benefit component of the social security system (CSS), which will run out of resources in late 2025. A combination of parametric and non-parametric reforms (including finding new funding sources) may be needed.

Supporting Convergence

For income convergence to continue, labor productivity growth will need to accelerate. About three quarters of the improvement in Panama’s income level vis a vis the US in the 25 years preceding the pandemic was the result of an increase in the employment to population rate, rather than faster labor productivity growth. Going forward, the increase in the employment to population ratio is likely to be slower. The demographic transition has largely run its course, and labor force participation in Panama already exceeds the average in the region and in high-income countries. Continuing to attract FDI, improving the quality of education, and reducing the share of informal employment will be key to foster labor productivity and growth.

Strengthening Financial Integrity

When the FATF removed Panama from the grey list in October, it encouraged the authorities to further strengthen the AML/CFT regime by (i) enhancing the searchability of the Ultimate Beneficiary Owner (UBO) registry to allow searches based on the name of the legal person or natural person, as well as on the name of the beneficial owner(s); and (ii) increasing the use of financial intelligence products by competent authorities.

In line with FSAP recommendations, sectoral risk assessments of Fintech institutions and virtual asset service providers (VASPs) should aim to identify and assess potential threats and risks from these sectors. In May 2023, there were 20 Fintech companies authorized by the Ministry of Industry and Commerce and operating within the financial sector providing payments, investments, and credit services. However, not all Fintech companies were subject to the full range of AML/CFT obligations as established by Law 23 of 2015.

Strengthening Financial Sector Resilience

Aggregate capital and liquidity buffers in Panama’s banking sector are well above regulatory minima and all banks meet the regulatory requirements. In the absence of a lender of last resort and deposit insurance, Panama has relied on banks’ self-insurance through capital and liquidity buffers as well as funding from foreign sources to contain financial stability risks.

Banks should continue to maintain strong liquidity and capital buffers and supervisors should continue to monitor developments closely. This is particularly important in the period ahead, given that profitability may have peaked, and loan portfolios may increasingly be affected by tighter financial conditions and slowing economic growth. Monitoring and containing risks will benefit from further developing supervisors’ analytical capabilities, establishing additional borrower-based macroprudential tools, and enhancing the collection of data, in particular on borrowers’ financial conditions and the real estate market. Supervisors should also use and further develop the Financial Coordination Council (CCF) to exchange information, jointly assess risks across segments of the financial system and the economy, and coordinate actions. Efforts to address cybersecurity risks should be stepped up.

The financial safety net for banks needs further strengthening. Progress has been made toward establishing a capital buffer framework aligned with Basel III, with the adoption last year of a regulation introducing the capital conservation buffer (CCB). These efforts should be continued, notably by phasing in capital surcharges for domestic systemically important banks (D-SIBs). Reforming the resolution framework and establishing prudential requirements for banks to develop recovery plans would also be important steps forward.

Finally, Panama urgently needs a payments systems law that, among other things, allocates responsibility for payment systems oversight to the SBP.

Improving Statistics

The timeliness, quality, and availability of economic data in Panama needs further improvement. The rebasing of GDP and the just completed population census stand to benefit policy making and the design of social programs. At the same time, the resources reallocation needed to complete these projects caused in part significant delays in key macroeconomic data. A properly funded Instituto Nacional de Estadística y Censo (INEC), in coordination with other data agencies, would lead the implementation of the priorities identified in the National Statistical Plan, which include the subscription to the Special Data Dissemination Standard (SDDS).

We thank the authorities for their warm welcome and fruitful discussions.

IMF Communications Department

PRESS OFFICER: Rosa Hernandez

Phone: +1 202 623-7100Email: