IMF Executive Board Concludes 2024 Article IV Consultation with Panama

IMF News, June 27, 2024

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Between 1994 and 2019, GDP per capita increased from 33 percent of US GDP per capita to 48 percent.
Panama grew very rapidly in the two decades preceding COVID-19 driven by an unprecedented construction and investment boom, including enlargement of the Panama Canal and the Tocumen airport, and expansion of services and logistics.
From the supply side, convergence was supported by a sharp increase in the employment-to-population rate driven by a demographic transition, an increase in female labor force participation, and a significant drop in unemployment.
In 2020, GDP fell by 17.7 percent, with a strict lockdown and a six-month shutdown of the construction sector resulting in a 50 percent decline in investment as key factors.
For the third year in a row, real GDP growth surprised on the upside, reaching 7.3 percent in 2023.
GDP has grown by 39 percent since 2020 and 14 percent since 2019 and surpassed pre-crisis levels in 2022.
Private consumption remains below 2019 levels despite overall GDP surpassing pre-COVID-19 levels.
Unemployment: surged from 7.1 percent in 2019 to 18½ percent in 2020, then fell to 7.4 percent in August 2023.
Fiscal deficit declined from 10.0 percent of GDP in 2020 to 3.0 percent of GDP in 2023, in line with the Social and Fiscal Responsibility Law (SFRL) and helped by one-off revenue sources.
Panama exited the FATF grey list in November 2023.

GDP growth projections:
- 2024: 2.5 percent
- 2025: 3.0 percent
- 2026: 4.0 percent
The closure of the Cobre Panamá copper mine is a major near-term factor; the mine contributed, directly and indirectly, about 5 percent of Panama’s GDP.
Non-mining sector growth is likely to slow as the post-pandemic rebound has likely run its course and Panama faces higher financing costs.
The near-term economic outlook is subject to a large degree of uncertainty and the balance of risks is tilted to the downside.
Key risks include:
- Loss of investment grade
- Further social unrest
- Fallout from the end of copper production (including from international arbitration proceedings)
- External risks
Over the medium term, GDP is expected to grow by around 4 percent, subject to considerable uncertainty as construction and investment are unlikely to provide the same support as before the pandemic and the scope for a significant increase in the employment-to-population ratio is limited.

The external position is assessed to be broadly in line with the level implied by fundamentals and desirable policies.
The SFRL goal of reducing the fiscal deficit over time to 1.5 percent of GDP remains appropriate.
Meeting the 2024 fiscal deficit target of 2.0 percent of GDP would require an unduly large compression of public investment.
A fiscal deficit of 4 percent of GDP in 2024 would be adequate from a cyclical perspective, avoiding an overly large investment compression and allowing a more gradual adjustment to the permanent loss of fiscal revenues from Minera.
If the deficit stays around 4 percent of GDP in coming years, there would be no further decline in the debt ratio, leaving public finances vulnerable to renewed shocks.
Recommendation: The public finances strategy for 2025 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.
Without a credible plan, the risk of further sovereign downgrades is high, which would increase financing costs and exacerbate possible adverse debt dynamics.

Being a dollarized economy adds to the importance of maintaining fiscal sustainability and financial stability.
With no lender of last resort and deposit insurance, it is imperative that the banking system remains well-capitalized and liquid.
The Panamanian banking system appears broadly resilient against severe downturn scenarios, but risks have increased amidst higher interest rates and a slowing economy.
Current capital adequacy and liquidity indicators in the banking system are well above regulatory minima.
Continued intensive supervision and monitoring and expanding the macroprudential policy toolkit will help mitigate future asset quality and liquidity risks.
The recent FSAP outlined a reform agenda to underpin financial stability and foster further financial development.
All Fintech companies that carry out financial activities as defined by the FATF should be subject to AML/CFT regulation and supervision.

For income convergence to continue, labor productivity growth will need to accelerate.
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.
Key policy priorities to foster labor productivity and growth:
- Continue to attract FDI
- Improve the quality of education and governance
- Reduce the share of informal employment

Source: IMF Executive Board conclusion of the 2024 Article IV consultation with Panama.