Panama: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, October 3, 2018
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- Published: October 3, 2018
Mission overview
- An IMF team led by Alejandro Santos visited Panama from September 24-October 3 to conduct discussions for the 2018 Article IV consultation.
- The team met with the Minister of Economy and Finance Eyda Varela de Chinchilla, Banks Superintendent Ricardo Fernandez, other senior public officials, and private sector representatives.
- Press contact: PRESS OFFICER: Raphael Anspach; Phone: +1 202 623-7100; Email: MEDIA@IMF.org
Recent economic performance (key findings)
- Growth and activity
- Growth estimated at 3.7 percent in H1-2018 (compared to 5.4 percent in 2017).
- Construction experienced a sharp slowdown, affected by a prolonged strike in April/May.
- Unemployment rate increased marginally to 5.8 percent in March 2018 from a year ago.
- Inflation
- Inflation remains low and stable at around 1 percent (y/y) in August 2018 (compared to 0.5 percent in December 2017), despite supply shocks increasing food and fuel prices.
- Fiscal performance
- Overall deficit of the NFPS reached 1.6 percent of GDP in H1-2018 (compared to deficit of 0.2 percent of GDP in the first half of 2017), due to underperforming tax revenue and strong growth in current and capital expenditures.
- External position
- Current account deficit remained at 8 percent of GDP in 2017 and deteriorated further in the first half of 2018 as international oil prices rebounded.
- The current account deficit remains mostly covered by foreign direct investment.
Outlook and projections
- Short- and medium-term outlook
- The mission stressed that the balance of risks to the current forecast (i.e., 4.6 percent for 2018 and 6.8 percent for 2019) is to the downside.
- Despite the slowdown, the revised growth forecast will remain above 4 percent in 2018 and will continue to be above 6 percent in 2019, supported by a recovery in construction, transport, logistics and exports from a new copper mine.
- Over the medium-term, growth is expected to moderate to its potential of 5½ percent.
- Inflation will remain subdued to about 2 percent.
- External imbalances are expected to continue declining and to remain broadly consistent with fundamentals.
- The fiscal position will remain stable, with the overall deficit of the NFPS projected at about 1½ percent over the medium term, keeping public debt on a declining path.
Risks (assessment)
- Risks are elevated and tilted to the downside.
- Key domestic risks
- Failure to demonstrate progress on outstanding FATF recommendations, notably criminalization of tax evasion ahead of the next FATF Plenary in February 2019, and lack of progress on tax transparency and information exchange could expose Panama to reputational damage and other consequences.
- Continued oversupply in domestic property markets could impact financial stability and the real economy.
- External risks
- Weaker-than-expected global growth and escalating trade tensions in advanced economies could dampen exports and government revenue.
- A sharp tightening of global financial conditions and a stronger US dollar would erode Panama’s competitiveness.
Financial integrity and tax transparency (policy recommendations)
- AML/CFT
- Effective implementation of the AML/CFT framework must remain a priority.
- Continue strengthening supervisory capacity for AML/CFT oversight, building on a recent positive assessment by GAFILAT.
- Further develop risk-based approaches to AML supervision to channel resources to critical areas and enhance understanding of AML/CFT risks, particularly in highly vulnerable sectors.
- Address outstanding gaps in the legal framework to fully align with international standards.
- Make tax crimes a predicate offense to money laundering by approving the draft legislation under consideration without further delay.
- Ensure availability of beneficial ownership and accounting records of Panamanian entities to avoid being listed as a non-cooperative jurisdiction.
- Continue efforts to sensitize the international community on progress with financial integrity.
- Tax transparency and BEPS
- Continue actions to share tax information under the OECD’s common reporting standard and the Multilateral Competent Authority Agreement.
- Prioritize advancing implementation of tax transparency initiatives towards a successful Global Forum assessment against enhanced standards.
- Implement the minimum standards on Base Erosion and Profit Shifting (BEPS), in line with Panama commitments as a member of the OECD/G20’s Inclusive Framework on BEPS.
Fiscal framework (policy recommendations and measures)
- Simplified fiscal rule (SFRL)
- Authorities sent legislation to the National Assembly to modify the SFRL to improve transparency.
- The new SFRL establishes a ceiling on the headline deficit of the NFPS of 2 percent of GDP in 2018, 1¾ percent in 2019-20, and 1½ percent of GDP after 2020, with the target over the medium-term broadly consistent with the current limit under the law.
- If approved this year, the new legislation will allow for a higher fiscal deficit by ½ of GDP for 2018 (compared with the current SFRL), which would be appropriate given the weakening activity.
- If the legislation is not approved, the fiscal stance would be broadly neutral for 2018.
- The track-record of fiscal discipline ensures debt sustainability.
- Fiscal council and revenue administration
- Adopt measures to further reinforce the fiscal framework; the proposal to establish a fiscal council (legislation submitted in 2017) would promote accountability and informed public debate on fiscal policy.
- Continue and sustain progress to strengthen revenue administration.
- Urgently improve governance and institutional capacity of the customs administration along several dimensions: human resources, ad hoc exemptions, control processes, and data collection and management.
- Publish a list of estimated foregone revenues due to tax incentives and exemptions to initiate public debate to review complex schemes that erode the tax base.
Financial sector reforms (policy recommendations)
- Systemic risk oversight and data
- Strengthen systemic risk oversight to build resilience and guard against macro-financial feedback loops.
- Address data gaps on household and corporate balance sheets and property prices as a top priority.
- Enhance coordination on systemic risk assessment across financial sector supervisors and with the Ministry of Finance through the Financial Coordination Council (CCF).
- Develop an institutional framework for macroprudential policy and tools to provide policy flexibility in addressing macrofinancial risks.
- Prudential regulation, supervision, and crisis management
- Continue alignment of prudential regulations with Basel III; shift priority to strengthening risk-based supervision of banks and non-banks.
- Put in place a robust framework for crisis management, including adequate liquidity support for banks and deposit insurance.
- Strengthen the bank resolution framework by enhancing the range of resolution tools to facilitate timely resolution of troubled banks.
- FinTech
- Recognize FinTech’s potential to transform Panama’s regional banking sector; apply close supervision and adequate regulation to nurture benefits while preserving financial stability.
Concluding note
- Policies should aim at preserving Panama’s competitive advantage as an attractive destination for business by maintaining fiscal discipline, strengthening AML/CFT oversight, enhancing tax transparency and information exchange, and reinforcing financial sector resilience.
- The mission thanks the Panamanian authorities for their cooperation, hospitality, and candid discussions.
Source: Panama: Staff Concluding Statement of the 2018 Article IV Mission (October 3, 2018) — International Monetary Fund.