Press Release No. 15/323

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Panama

July 7, 2015

On June 10, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Panama.

Panama’s economic performance is expected to remain strong. Real GDP slowed to 6.2 percent in 2014, reflecting a slower pace of public investment, continued weakness in Colon Free Zone activity, and delays in the Canal expansion. Growth is expected to remain stable in 2015. Lower oil prices and the U.S. recovery will be positive forces but these will be offset by U.S. dollar appreciation and some lags in new public investment. Over the medium term, the expanded Canal and the new copper mine should help maintain growth at 6-7 percent. Inflation moderated to 2.6 percent in 2014 as a result of lower oil prices and price controls on certain food items. Inflation is expected at around 1 percent in 2015, taking into consideration the January increase in electricity tariffs, and assuming a slow upward trajectory for oil prices and the elimination of price controls in July.

The 2014 fiscal deficit reached 4.3 percent of 1996-base GDP. Revenues increased by
1.1 percent while current primary expenditures grew by 13 percent. Going forward, the fiscal framework envisaged in the Social and Fiscal Responsibility Law (SFRL) aims at removing the effects on government spending of cyclical fluctuations in Canal contributions. Accordingly, the overall fiscal deficit can exceed the SFRL deficit ceilings up to the amount that budget contributions from the Canal are below 3.5 percent of GDP (if above, the difference would instead be credited to the Sovereign Wealth Fund). In line with the framework, the 2015 fiscal deficit is expected at 3.8 percent of 1996-base GDP in order to accommodate past commitments on capital expenditures as well as a projected weak revenue performance. Total gross debt of the public sector (including the Canal Authority debt) increased to about 46 percent of GDP in 2014, reversing the declining trend seen since 2005. Nonetheless, public debt is projected as sustainable. Under the planned policies, total gross public debt is projected to decline by about
5 percentage points of GDP by 2019. However, additional liabilities encompass unfunded pension liabilities, other outstanding public liabilities, and the contingent liabilities linked to public companies.

The current account deficit remained elevated in 2014, at 12 percent of GDP, owing in part to strong investment-related imports, but should moderate over time as investment projects wind down and exports increase. This deficit is expected to continue to be financed by buoyant foreign direct investment inflows (including in the mining, logistics and energy sectors).

The authorities and the Financial Action Task Force (FATF) agreed on a plan to address the deficiencies related to Panama’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, to bring the framework in line with the international standard. The authorities have made substantial progress, including the passing of new AML/CFT legislation.

Near-term risks mostly relate to a weaker global economy or to possible delays in enhancing financial transparency. Slower-than-expected global growth and weaker trade represent downside risks. An abrupt surge in global financial market volatility or an upward shift in U.S. interest rates would feed quickly into the local financial system, with spillover effects on the local economy. However, strong fundamentals and the room to implement a countercyclical fiscal response would mitigate the impact of such external shocks. The potential negative impact from delays in concluding the measures to tackle financial transparency shortcomings could be significant. Conducting international transactions has become somewhat more difficult due to concerns over transparency and weaknesses of the AML/CFT framework, including through increased due diligence by correspondent banks. Delaying reforms to financial integrity and transparency could have negative implications for the economy through higher costs of trade settlements, difficulty in obtaining cross-border borrowing and potential decline in FDIs.

Executive Board Assessment²

Executive Directors commended Panama’s robust macroeconomic performance and continued solid economic growth. Noting Panama’s exposure to external shocks in global growth, trade, and financial markets, Directors stressed the importance of enhancing the fiscal framework and fostering resilience through strengthened fiscal buffers, while maintaining financial stability and sustaining strong and inclusive growth.

Directors encouraged the authorities to strengthen the fiscal framework for the medium term. They advised revising the threshold for canal contributions in line with average expected contributions, while adopting a more comprehensive definition of net debt in the Social and Fiscal Responsibility Law (SFRL). Directors also recommended continued efforts to enhance revenue mobilization through capacity building and administrative reforms. They welcomed the progress in reducing electricity subsidies, and encouraged further efforts to improve the targeting of subsidies and streamline current spending.

Directors underscored the importance of reforming the pension system to address large unfunded liabilities, while curbing other contingent liabilities. They looked forward to full implementation of the Single Treasury Account and progress on other initiatives to improve public financial management.

Directors commended the authorities for the progress in enhancing the financial integrity and transparency frameworks, including the recent passage of AML/CFT legislation and ongoing implementation of the action plan agreed with the Financial Action Task Force (FATF). They called for expeditious resolution of the remaining deficiencies to bring the financial integrity and transparency frameworks fully in line with the international standard.

Directors noted that Panama’s banking system remains stable, well capitalized and highly liquid, but advised continued efforts to strengthen bank supervision and risk monitoring. They encouraged swift implementation of the remaining 2011 FSAP recommendations, and called for further progress on a well-designed liquidity facility for banks. Directors also recommended better monitoring of financial risks and macrofinancial linkages, and further development of the macroprudential policy framework.

Directors agreed that improvements in productivity and human capital are key to sustainable, equitable, and inclusive growth. This will require efforts to further enhance the quality of public education and healthcare, upgrade skills, stimulate youth employment and female labor force participation, and strengthen institutions. They also recommended that the authorities take advantage of the current benign inflation environment to phase out price controls.

Directors encouraged the authorities to improve the quality and coverage of statistics, which would help close gaps in data that are relevant for conducting sound macroeconomic policy and risk assessment.