Panama: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, March 17, 2017
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- Published: March 17, 2017
Economic outlook and key macro projections
- Panama’s economy is expected to remain among the most dynamic in the region; the economic outlook is favorable but set against the backdrop of heightened external uncertainty.
- Growth projections:
- Economic growth is projected to pick up slightly to 5.1 percent in 2017 and about 5.5 percent over the medium term, supported by the expanded Canal and the wide range of investment projects.
- Inflation:
- Inflation is projected to pick up to about 2 percent in 2017 from 0.7 percent in 2016 as fuel prices continue to normalize and economic activity strengthens somewhat.
- Fiscal stance and debt:
- Fiscal consolidation is projected to continue in line with the Social Fiscal Responsibility Law (SFRL) deficit targets, implying a gradual reduction of the non-financial public sector (NFPS) deficit over the medium term and placing NFPS debt as a share of GDP on a downward trajectory.
- External sector:
- The current account deficit is projected to further narrow to about 3 percent of GDP over the medium term, driven by a diversification of exports into primary commodities, and to continue to be financed by broad-based foreign direct investment.
Risks and external vulnerabilities
- Key risks:
- Weaker-than-expected global growth or a shift toward increasing trade restrictions could lead to a slowdown in Canal activity, damping Panama’s growth and government revenue.
- A faster-than-expected tightening of U.S. monetary policy and continued appreciation of the U.S. dollar could put continued appreciation pressure on Panama’s REER and erode external competitiveness.
- Pressures on correspondent banking relations could adversely affect Panama’s international financial center.
- Structural risk to growth model:
- Panama needs to address deficiencies in tax transparency, exchange of tax information, and AML/CFT to preserve its role as an international financial and business center.
Tax transparency and AML/CFT (financial integrity)
- Recent actions and commitments:
- Panama committed to implement automatic exchange of tax information by 2018, ratified the OECD’s Multilateral Convention on Tax Matters, and adopted key domestic legislation forming the legal basis for automatic exchange of tax information, strengthening revenue administration powers, and reinforcing accounting requirements for companies and foundations registered in Panama.
- Remaining gaps and priorities:
- To obtain a positive assessment under the Global Forum’s fast-track procedure in mid-2017 it is essential to address remaining deficiencies, including strengthening the revenue administration’s human, procedural, and ICT capacities to ensure effective exchange of tax information.
- AML/CFT framework: the most critical remaining gap is to make tax crimes a predicate offence to money laundering.
- Completion of the national risk assessment in January 2017 is an important milestone; its findings should be addressed in the national AML/CFT strategy being developed.
- Panama will need to demonstrate effective implementation of the framework to receive a positive assessment in the Financial Action Task Force of Latin America’s assessment later this year.
Fiscal sustainability, fiscal framework, and revenue administration
- Fiscal consolidation path:
- The planned medium-term consolidation path, in line with the Social Fiscal Responsibility Law’s fiscal rule, is needed to restore credibility and place NFPS debt-to-GDP on a downward path.
- Fiscal risks and contingent liabilities:
- Public sector fiscal risks and contingent liabilities need better monitoring.
- Publishing additional information in the fiscal accounts about the different stages and accrued obligations for turnkey projects would enhance transparency and accountability.
- The reserves of the exclusively defined-benefit pension subsystem are expected to be depleted in a decade. Without a parametric reform (e.g. to the retirement age or replacement rate), these shortfalls would put expenditure pressures in subsequent years and crowd out other components of public spending.
- A comprehensive assessment of all contingent liabilities of the consolidated public sector is necessary to ensure the SFRL’s debt target results in adequate buffers to face fiscal risks.
- Fiscal council recommendation:
- Establishing a fiscal council could strengthen the fiscal framework by publicly assessing and monitoring fiscal assumptions and results, including performance under the fiscal rule.
- Ensuring legal and operational independence and adequate resourcing of the fiscal council are indispensable.
- Revenue and customs administration:
- Continued progress in strengthening revenue administration would help generate resources to finance strategic public investments.
- Recent measures (improvements in tax administration, enhancement of human resources, introduction of partial VAT withholding, upgraded tax filing system) contributed to the strongest tax performance over the last three years.
- Further measures: strengthen institutional capacity, upgrade IT systems, strengthen incentives for tax compliance.
- Customs administration needs to address weaknesses in institutional capacity, advance trade facilitation, reform control processes, and improve data collection and management.
- Review and streamline the complicated scheme of tax incentives and exemptions, starting by publishing a list of the estimated fiscal cost of each of these measures.
Financial sector oversight, macroprudential policy, and crisis management
- Monitoring systemic risk:
- The Financial Coordination Council has taken steps to enhance oversight of financial conglomerates and deepen information exchange across financial supervisors, but further coordination is desirable given decentralized supervision.
- Enhanced data are needed to assess systemic risk, particularly household and corporate balance sheet vulnerabilities, and residential and commercial property prices.
- Increased information exchange with home supervisors of foreign institutions is imperative to monitor cross-border exposures.
- Improved supervision of non-bank financial institutions is critical.
- Macroprudential framework:
- A framework for macroprudential policy should be established; Panama does not have a central bank or lender of last resort.
- Macroprudential tools applicable to the Panamanian context should be developed; additional capital buffers for financial conglomerates with international presence could be considered.
- Priority macroprudential focus: household sector. Based on enhanced data collection and monitoring, consider limits on loan-to-value ratios, maximum debt-to-income and debt service-to-income ratios.
- Crisis management and safety net:
- Liquidity: while official definitions indicate high banking system liquidity, it appears low relative to comparable countries and Basel III requirements; financial regulations should be aligned with Basel III.
- Establish a temporary liquidity facility for banks to address systemic shocks as a complement to the facility recently put in place by the Banco Nacional de Panamá; current coverage appears inadequate to handle systemic shocks.
- Upgrade the bank resolution framework to provide the bank superintendency with sufficient powers to effectively resolve financial institutions.
- Consider deposit insurance to provide protection to depositors in the event of a financial crisis.
- Prepare a crisis management plan to coordinate supervisory agencies, with the Financial Coordination Council tasked to prepare and maintain such a plan, including hypothetical simulation exercises.
Inclusion, education, and social safety nets
- Education reform priorities:
- Continued focus on education reform is essential for promoting inclusive growth.
- In line with the Government Strategic Plan, prioritize measures to strengthen technical education, upgrade vocational skills, revamp language training, and improve qualifications of teachers to address skill shortages and improve competitiveness.
- Enhanced assessment and accountability at different stages of the education process are needed to translate reforms into outcomes.
- Social protection and indigenous inclusion:
- Strengthen targeting and effectiveness of social assistance programs.
- Maintain a continued focus on public services that tackle the specific needs of indigenous groups to strengthen their economic inclusion.
- Prioritize public investment toward projects with high social returns that raise productivity, enhance competitiveness, and open new growth opportunities.
Closing acknowledgement
- The mission thanks the Panamanian authorities for their excellent cooperation, kind hospitality, and candid and open discussions.
Staff Concluding Statement of the 2017 Article IV Mission