## IMF Executive Board Concludes 2020 Article IV Consultation with Panama

_IMF News, March 26, 2020_

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## Bibliographic details
- Published: March 26, 2020

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### Scope and context
- Staff Report prepared for Executive Board consideration on March 24, 2020; reflects discussions with Panamanian authorities during February 4–17, 2020 and is based on information available as of February 21, 2020.
- Report focuses on Panama’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic; it does not reflect the implications of those subsequent developments.
- The outbreak has greatly amplified uncertainty and downside risks around the outlook; staff is closely monitoring the situation and will continue to assess its impact and related policy response in Panama and globally.
- The Executive Board concluded the Article IV consultation on March 24, 2020 and considered and endorsed the staff appraisal without a meeting.

### Recent economic developments (as described in the report)
- After a decade of high growth, the economy slowed in 2018–19 and growth is estimated to have reached 3.0 percent in 2019.
- Inflation slid below zero for most of 2019 due to soft demand; consumer price index (average) in 2019 was -0.4.
- Credit growth decelerated; total unemployment rate rose slightly to 7.1 percent in August 2019, compared to 6.0 percent the previous year.
- Copper exports helped narrow the external current account deficit to 5.2 percent of GDP.
- Confronted with a sharp revenue shortfall in mid-2019, the government revised the fiscal rule widening the deficit ceiling of the non-financial public sector to 3.5 percent of GDP (from 2.0 percent in 2018), with gradual adjustments in subsequent years.
- Fiscal deficit amounted to 3.1 percent of GDP in 2019; uncovering of previously unrecorded arrears of over 2 percent of GDP increased central government debt to 46.2 percent of GDP.
- Panama was placed on the FATF grey list in June 2019; limited impact on the economy and banking system thus far; government initiated reforms to address remaining AML/CFT deficiencies.
- For 2020, the deficit will likely surpass the limit under the fiscal rule of 2.75 percent of GDP as there will be a need to support the economy and increase public health spending in view of COVID-19.

### Executive Board assessment — key findings and risks
- Growth
  - Growth is expected to rebound in 2020. Economic activity is projected to recover after a slowdown in 2018-19, supported by full-scale copper production and robust private investment.
  - Growth over the medium-term is expected to remain at its potential.
  - Key risks: setbacks in exiting the FATF grey list; complying with SFRL deficit ceilings; slowdown in Canal traffic amid escalating trade tensions; weak growth in key trade partner countries; the coronavirus outbreak.
  - External imbalances expected to decline over the medium-term, but the external position is moderately weaker than fundamentals and desirable policy settings.
- Fiscal policy and public debt
  - Sustained fiscal discipline is required for fiscal policy credibility and to keep public debt on a downward trajectory.
  - Central Administration debt reached 46.2 percent of GDP in 2019 amid a relatively high deficit exacerbated by newly discovered unrecorded arrears.
  - The modified gradual adjustment of the deficit ceiling under the SFRL is appropriate to smooth the pace of necessary fiscal consolidation.
  - Authorities should consider using a “shadow” structural rule in the future to build fiscal buffers.
- Revenue, expenditure, and pensions
  - A realignment of fiscal revenue and expenditures is imperative to sustain growth.
  - Improve capacity of tax and customs administrations; review Panama’s complex tax exemptions that erode the tax base.
  - On expenditure: realign current spending with social needs—including by investing more in education—and improve effectiveness of social spending.
  - Capital projects need careful assessment and prioritization.
  - Pension system needs strengthening: gradually align pension contributions with expected payouts; recommend a slow-paced approach given political sensitivity.
- Fiscal framework and arrears
  - Strengthening the fiscal framework is essential: address sizable unrecorded arrears by strengthening budgetary execution rules and misuse penalties and streamline recording of fiscal accounts.
  - Limit use of turnkey projects and deferred payment contracts in public investment projects.
- AML/CFT and tax transparency
  - Exiting the FATF grey list must remain a priority; continue addressing deficiencies in AML/CFT regime and legal framework identified by the FATF.
  - Address shortcomings identified in the 2019 Global Forum review on global tax transparency, including timely responses to exchange-of-information requests.
- Financial sector and regulation
  - Financial sector remains robust, but macrofinancial risks warrant continued monitoring.
  - Address data gaps on household and corporate balance sheets and property prices; improve housing price indices.
  - Align prudential regulations with Basel III; focus on macroprudential tools and upgrade regulatory toolkit.
  - Establish robust frameworks for crisis management, including adequate liquidity support for banks and enhancing resolution tools for failed banks.
- Fintech and digital potential
  - Fintech sector holds potential with an appropriate regulatory framework: adopt cybersecurity and fintech regulatory frameworks; capitalize on Panama’s digital and mobile connectivity to enhance financial inclusion and lower intermediation costs.
- Structural reforms and inclusiveness
  - Reinforce structural reform agenda to maintain high potential growth: improve productivity and competitiveness, labor mobility, governance and institutional capacity, and innovation and technological sophistication.
  - Upgrade workforce skill levels, streamline insolvency framework, and improve judicial system functioning.
  - Address social inequities urgently: revamp social policies in education, gender equality, social protection programs, and poverty reduction in the comarcas.
- Climate and natural resources
  - Panama’s climate change mitigation strategy and commitments are welcome.
  - Beyond green energy provision, authorities should be mindful of natural resource preservation given susceptibility to extreme weather events.
  - Pressure for better water management is mounting from expanded Canal operations and a growing population.

### Selected indicators and projections (as presented)
- Table 1. Panama: Selected Economic and Social Indicators
  - Population (millions, 2018) 4.2
  - Poverty line (percent, 2017) 20.7
  - Population growth rate (percent, 2018) 1.6
  - Life expectancy at birth (years, 2017) 78.1
  - Total unemployment rate (August, 2019) 7.1
  - Adult literacy rate (percent, 2018) 95.4
  - GDP per capita (US$, 2018) 15,507
  - IMF Quota (SDR, million) 376.8
- Selected historical and projected macro aggregates (percent change unless noted)
  - Real GDP (2007 prices)
    - 2016 5.0
    - 2017 5.6
    - 2018 3.7
    - 2019 3.0
    - 2020 4.0 (projection)
  - Consumer price index (average)
    - 2016 0.7
    - 2017 0.9
    - 2018 0.8
    - 2019 -0.4
    - 2020 0.5 (projection)
    - 2021 1.5 (projection)
  - Consumer price index (end-of-year)
    - 2016 0.2
    - 2017 -0.1
    - 2018 1.0
    - 2019 2.0
  - Output gap (% of potential)
    - 2016 0.3
    - 2017 -0.7
    - 2018 -0.9
  - Public consumption growth rates
    - 2016 10.1
    - 2017 6.5
    - 2018 7.5
    - 2019 8.7
    - 2020 2.1 (projection)
    - 2021 5.7 (projection)
  - Private consumption
    - 2016 7.1
    - 2017 3.1
    - 2018 2.3
    - 2019 3.2
  - Public investment 1/
    - 2016 49.0
    - 2017 -20.7
    - 2018 7.0
    - 2019 -5.2
    - 2020 1.1 (projection)
    - 2021 5.8 (projection)
  - Private investment
    - 2016 -5.5
    - 2017 14.9
    - 2018 -3.7
    - 2019 6.1
  - Imports and exports (selected)
    - Exports 2016 -4.3; 2017 -0.3; 2018 7.2; 2019 (not listed)
    - Imports 2016 -4.8; 2017 4.7; 2018 2.8; 2019 -2.7; 2020 7.3 (projection)
  - Financial sector
    - Private sector credit 2016 8.4; 2017 4.5; 2018 4.6; 2019 6.6
    - Broad money 2016 4.1; 2017 5.2
    - Average deposit rate (1-year) 2016 2.7; 2017 3.5; 2018 3.9
    - Average lending rate (1-year) 2016 4.3
  - Savings-investment balance (In percent of GDP)
    - Gross domestic investment: 2016 40.5; 2017 41.7; 2018 41.3; 2019 38.4; 2020 38.6; 2021 38.2
    - Public sector (share of GDI): 2016 7.8; 2017 5.9
    - Private sector (share of GDI): 2016 32.7; 2017 35.8; 2018 35.2; 2019 33.2; 2020 33.6
    - Gross national saving: 2016 33.1; 2017 32.0; 2018 31.9
  - Public finances 1/
    - Revenue and grants: 2016 22.6; 2017 22.0; 2018 21.9; 2019 20.8; 2020 20.4; 2021 20.7
    - Expenditure: 2016 24.8; 2017 24.2; 2018 23.4; 2019 22.8
    - Current, including interest: 2016 16.7; 2017 17.0; 2018 17.1; 2019 17.8; 2020 17.5
    - Capital: 2016 8.0; 2017 6.9; 2018 5.3; 2019 (not listed)
    - Overall balance, including ACP: 2016 -2.2; 2017 -2.9; 2018 -2.6; 2019 -2.4; 2020 -2.1
    - Overall balance, excluding ACP: 2016 -2.0; 2017 -3.2; 2018 -3.1; 2019 -2.5
  - Total public debt (Debt of the Non-financial public sector 2/)
    - 2016 34.8
    - 2017 36.8
    - 2018 41.0
    - 2019 42.1
  - External and domestic debt shares (percent of GDP)
    - External: 2016 28.5; 2017 28.7; 2018 30.5; 2019 34.9; 2020 35.3; 2021 34.7
    - Domestic: 2016 6.3; 2017 6.2; 2018 6.8; 2019 7.4
  - Debt of ACP: 2016 4.4; 2017 3.6
  - Other 3/: 2016 3.8; 2017 3.4
  - External sector
    - Current account: 2016 -7.8; 2017 -5.9; 2018 -8.2; 2019 -6.1
    - Net foreign direct investment inflows: 2016 7.9; 2017 5.1
    - External debt: 2016 159.9; 2017 149.6; 2018 151.8; 2019 156.5; 2020 160.2; 2021 160.0
  - Memorandum item
    - GDP (in millions of US$): 2016 57,908; 2017 62,219; 2018 65,128; 2019 66,801; 2020 69,850; 2021 74,443

1/ Includes Panama Canal Authority (ACP). Includes Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18.
2/ Non-Financial Public Sector according to the definition in Law 31 of 2011.
3/ Includes debt of public enterprises outside the national definition of NFPS (ENA, ETESA, and AITSA) and non-consolidated agencies.

*Source: IMF Communications Department press release, March 26, 2020.*

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## References

- [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)
- [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)
- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Panama and the IMF](http://www.imf.org/external/country/PAN/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.IMF.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2020/03/26/pr20110-panama-imf-executive-board-concludes-2020-article-iv-consultation-with-panama_