Panama: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, March 4, 2024
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- Published: March 4, 2024
Overview and recent performance
- Panama’s income ratio to the US increased from thirty-three to forty-eight percent in the two decades preceding the pandemic.
- Rapid growth was driven by a construction and investment boom, including enlargement of the Panama Canal and Tocumen airport, and expansion of services and logistics.
- From the supply side, convergence was largely supported by a sharp increase in the employment to population rate due to a demographic transition, increased female labor force participation, and a significant drop in unemployment.
- Panama was hit hard by the pandemic but recovered strongly: GDP grew by 7.5 percent in 2023.
- Unemployment: 7.1 percent in 2019 → 18½ percent in 2020 → 7.4 percent in August 2023.
- Inflation: average inflation declined from 2.9 percent in 2022 to 1.5 percent in 2023; projected to be 2.2 percent (y/y) by end-2024 and about 2 percent in coming years.
2024 outlook and growth projections
- Closing of Minera (copper mine) after Supreme Court ruling and government intention to close the mine:
- Minera contributed, directly and indirectly, about 5 percent of Panama’s GDP.
- Permanent loss of about 0.6 percent of GDP in fiscal revenues.
- Loss of 7.5 percent of exports of goods and services.
- GDP growth is projected to decline to 2.5 percent in 2024, before gradually improving over the medium term.
- Over the medium-term, GDP is expected to grow by 4 percent.
- Current account deficit projected to range around 2 percent of GDP.
Risks to the outlook
- Balance of risks tilted to the downside.
- Key downside risks:
- Loss of investment grade status, raising external borrowing costs and refinancing risks.
- Renewed social unrest and further fallout from the closing of Minera.
- Longer-than-expected drought reducing ACP revenues and contributions to the government.
- Over the medium-term, claims from the mine arbitration posing significant fiscal risk.
Fiscal consolidation and public finances
- NFPS overall fiscal deficit: 10.2 percent of GDP in 2020 → 4.0 percent of GDP in 2022 → 3.0 percent of GDP in 2023 (in line with the SFRL).
- Fiscal consolidation drivers: higher revenues (including payments by Minera and sale of land to the ACP) and lower public investment; interest payments rose sharply.
- Government target for 2024: reduce fiscal deficit to 2.0 percent of GDP.
- 2024 budget authorizes an increase in spending of 3 percentage points of GDP compared to the 2023 outcome, with bulk to higher investment, interest payments, and mandated increase in education spending.
- The budget assumes an increase in central government revenue-to-GDP ratio despite non-repetition of Minera payments and land sale.
Public investment and recommended deficit path
- Staff estimate to meet 2.0 percent of GDP target: compress public investment to 2 percent of GDP (from 4¾ percent of GDP in 2023 and 6½ percent of GDP in the 2024 budget).
- Staff view: such compression may be infeasible and undesirable given unemployment increase from mine closing.
- Preferred staff recommendation: reduce public investment more moderately to 4 percent of GDP, accepting a transitory higher deficit in 2024.
- Staff assessment: a fiscal deficit of 4 percent of GDP in 2024 would be adequate from a cyclical perspective.
- SFRL goal: reduce fiscal deficit over time to 1.5 percent of GDP remains appropriate.
- If deficit stays around 4 percent of GDP in coming years, no further decline in the debt ratio, leaving public finances vulnerable and financing costs likely to increase.
- Requirement: 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.
- Plan should be anchored by explicit multi-annual revenue forecasts and expenditure limits and include identified measures to ensure forecasts and limits will be met.
Revenue mobilization and tax policy
- Central government tax revenue-to-GDP ratio: 7.7 percent in 2023.
- Causes of low tax revenues: low tax rates (ITBMS (VAT) rate of 7 percent), numerous exemptions, high tax expenditures, weak tax collection efficiency.
- Non-tax revenues partly compensate (mainly contributions from the ACP), but total general government revenue is relatively low.
- Administrative improvements implemented:
- DGI and ANA reforms: improved data gathering for personal income tax collection; adoption of electronic invoice; creation of a data analysis unit for cross-checking and detecting non-compliance; launch of a new Large Taxpayers Unit; new scanners at customs checkpoints.
- Recommended tax/base measures:
- Adopt a comprehensive risk management framework for tax administration.
- Increase autonomy and resources of ANA, including managing its own budget and HR policy.
- Broaden the tax base by reducing exemptions, deductions, and tax expenditures—many exemptions are regressive.
- Rationalize tax exemptions by:
- (i) streamlining ITBMS tax exemptions and the process for refunds;
- (ii) reviewing exemptions and deductions from the personal income tax;
- (iii) reviewing tax incentives for the corporate income tax.
- Consider increasing the ITBMS (VAT) rate.
- Adjust cigarette and fuel excises to account for externalities.
- Adopt a minimum corporate income tax for companies that pay taxes in countries where they are headquartered (in response to the introduction of an international minimum tax).
Social security (CSS)
- Defined benefit component of CSS will run out of resources in late 2025.
- Action required: combination of parametric and non-parametric reforms, including finding new funding sources.
Supporting convergence and productivity
- Historical convergence largely due to increased employment-to-population ratio: about three quarters of improvement vis a vis the US in the 25 years preceding the pandemic.
- Need to accelerate labor productivity growth because further increases in employment-to-population ratio are likely to be slower.
- Policy priorities to foster productivity and growth:
- Continue attracting FDI.
- Improve quality of education.
- Reduce share of informal employment.
Strengthening financial integrity and AML/CFT
- FATF removal from grey list in October; encouragement to further strengthen AML/CFT by:
- Enhancing searchability of the Ultimate Beneficiary Owner (UBO) registry to allow searches based on the name of the legal person or natural person, and on the name of the beneficial owner(s).
- Increasing the use of financial intelligence products by competent authorities.
- FSAP recommendations: conduct sectoral risk assessments of Fintech institutions and virtual asset service providers (VASPs) to identify and assess threats and risks.
- As of May 2023, there were 20 Fintech companies authorized by the Ministry of Industry and Commerce operating within the financial sector providing payments, investments, and credit services; not all Fintech companies were subject to the full range of AML/CFT obligations under Law 23 of 2015.
Financial sector resilience and safety net
- Aggregate capital and liquidity buffers in Panama’s banking sector are well above regulatory minima; all banks meet regulatory requirements.
- In absence of a lender of last resort and deposit insurance, Panama has relied on banks’ self-insurance through capital and liquidity buffers and foreign funding.
- Supervisory and resilience recommendations:
- Banks should maintain strong liquidity and capital buffers; supervisors should monitor developments closely given potential profitability peak and risks from tighter financial conditions and slowing growth.
- Further develop supervisors’ analytical capabilities.
- Establish additional borrower-based macroprudential tools.
- Enhance collection of data, particularly on borrowers’ financial conditions and the real estate market.
- Use and develop the Financial Coordination Council (CCF) to exchange information, jointly assess risks across the financial system and economy, and coordinate actions.
- Step up efforts to address cybersecurity risks.
- Financial safety net reforms needed:
- Continue progress toward Basel III-aligned capital buffer framework; regulation introducing the capital conservation buffer (CCB) was adopted last year.
- Phase in capital surcharges for domestic systemically important banks (D-SIBs).
- Reform the resolution framework and establish prudential requirements for recovery plans.
- Urgently adopt a payments systems law that allocates responsibility for payment systems oversight to the SBP.
Statistics and data
- Timeliness, quality, and availability of economic data need further improvement.
- Rebasing of GDP and completion of population census will benefit policy making and social program design.
- Resource reallocation to complete these projects caused significant delays in key macroeconomic data.
- A properly funded Instituto Nacional de Estadística y Censo (INEC), in coordination with other data agencies, should lead implementation of priorities in the National Statistical Plan, including subscription to the Special Data Dissemination Standard (SDDS).
Panama: Staff Concluding Statement of the 2024 Article IV Mission