Precautionary Credit Line Provides Panama with Crisis Insurance
IMF News, January 20, 2021
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- Published: January 20, 2021
Pandemic impact and macroeconomic fallout
- Panama was "severely affected" by the COVID-19 pandemic due to its role as a regional trade, transportation, and finance hub.
- Key observed impacts:
- Ship traffic through the Panama Canal dropped by "about 10 percent".
- Use of electricity fell by "some 7 percent in 2020".
- Output dropped by "an estimated 9 percent in 2020".
- Health and social spending pressures "surged".
- Panama has "one of the highest COVID-19 fatality rates in the world".
- Nationwide lockdowns were enforced; contagion "remain high, particularly around Panama City".
- Tax revenues—already "well below the regional average"—have fallen, resulting in a widening fiscal deficit and an increase in public debt.
Rationale for the 2-year Precautionary Liquidity Line of $2.7 billion
- The arrangement is described as an "insurance policy against risks" and aims to "boost investor confidence".
- It provides contingent access to liquidity if a second wave of COVID-19 or other shocks trigger a deeper recession or disruptions in private capital flows.
- Qualifying for a precautionary credit line requires "sound economic fundamentals and institutional policy frameworks, and a good track record of economic performance", which the line also signals to markets.
Policy priorities supported by the arrangement
- Immediate priorities:
- Facilitating vaccination.
- Supporting an adequate level of social and health spending.
- Continuing to strengthen institutional policy frameworks, including financial integrity and data adequacy.
- Preparing the economy for a post-pandemic recovery.
- How the precautionary line helps:
- Boosts market confidence.
- Provides protection against risks, helping the country "weather the crisis and lay the groundwork for recovery".
Past IMF engagement and structural reforms
- Historical engagement:
- Panama has had "20 IMF programs, two-thirds of them precautionary".
- Reforms achieved under past programs included:
- Reinforcing expenditure controls.
- Strengthening revenue collection.
- Privatizing enterprises.
- Improving financial supervision.
- Combating money laundering.
- Establishing targeted transfer programs to reduce poverty.
- Outcomes attributed to these reforms:
- The economy grew at an "average rate of 6 percent between 1992 and 2019".
- Achieved "the highest per capita income in Latin America".
Financial integrity and FATF de-listing efforts
- Panama agreed on an action plan with the Financial Action Task Force (FATF) to address weaknesses related to financial integrity.
- Authorities have hired "highly qualified international experts on anti-money laundering and combating the financing of terrorism" to guide the de-listing process and ensure adherence to international standards.
- The IMF is providing technical assistance in this area.
International Monetary Fund — "Precautionary Credit Line Provides Panama with Crisis Insurance" (January 20, 2021).