Numbers & Statistics

IMF Executive Board Concludes 2020 Article IV Consultation with Panama

By  | 

Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2020 Article IV Consultation with Panama







March 26, 2020







The Staff Report was prepared by a staff team of the IMF for the Executive
Board’s consideration on March 24, 2020. The staff report reflects
discussions with the Panamanian authorities during February 4-17, 2020 and
is based on the information available as of February 21, 2020. It focuses
on Panama’s near and medium-term challenges and policy priorities and was
prepared before COVID-19 became a global pandemic and resulted in
unprecedented strains in global trade, commodity and financial markets. It,
therefore, does not reflect the implications of these developments and
related policy priorities. The outbreak has greatly amplified uncertainty
and downside risks around the outlook. Staff is closely monitoring the
situation and will continue to work on assessing its impact and the related
policy response in Panama and globally.









On March 24, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation

[1]

with Panama and considered and endorsed the staff appraisal without a
meeting.

[2]

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 the year due to soft demand, while credit growth decelerated.
The unemployment rate rose slightly to 7.1 percent in August 2019, compared
to 6.0 percent the previous year. However, economic activity remained
subdued despite copper exports, which helped to narrow the external current
account deficit to 5.2 percent of GDP. Confronted with a sharp revenue
shortfall in mid-2019, the new government decided to revise 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), and gradually adjusting it in
subsequent years. In the event, the fiscal deficit amounted to 3.1 percent
of GDP in 2019, which together with the uncovering of previously unrecorded
arrears of over 2 percent of GDP, increased central government debt to 46.2
percent of GDP (although still below historical levels). Panama was placed
on the FATF grey list in June 2019, with limited impact on the economy and
the banking system thus far, and the government has initiated reforms to
address the remaining deficiencies in AML/CFT.

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 the current situation with
COVID-19.


Executive Board Assessment

[3]

In concluding the 2020 Article IV Consultation with Panama, Executive
Directors endorsed staff’s appraisal, as follows:

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 relate to setbacks in
exiting the FATF grey list and complying with SFRL deficit ceilings as well
as a slowdown in Canal traffic amid escalating trade tensions, weak growth
in key trade partner countries, and the coronavirus outbreak. While
external imbalances are expected to decline over the medium-term, the
external position is moderately weaker than fundamentals and desirable
policy settings.

READ ALSO  Interview with Cadena COPE

Sustained fiscal discipline is required for fiscal policy credibility and
to keep public debt on a downward trajectory. Amid a relatively high
deficit exacerbated by newly discovered unrecorded arrears, Central
Administration debt reached 46.2 percent of GDP in 2019. The modified
gradual adjustment of the deficit ceiling under the SFRL is appropriate to
smooth the pace of necessary fiscal consolidation. In addition, the
authorities should consider using a “shadow” structural rule in the future
to build fiscal buffers.

A realignment of fiscal revenue and expenditures is imperative to sustain
growth. In addition to improving the capacity of tax and customs
administrations, action is required to review Panama’s complex tax
exemptions that continually erode the tax base. On the expenditure side,
realigning current spending with social needs—including by investing more
in education—and improving the effectiveness of social spending will be
crucial to achieve sustainable and inclusive growth. Capital projects need
to be carefully assessed and prioritized going forward.

The pension system needs to be strengthened. Faced with slowing population
growth, the authorities need to gradually align pension contributions with
expected payouts, to avoid creating an undue burden to the public finances
in the long run. Given the politically sensitive nature of such
adjustments, a slow-paced approach is recommended.

Strengthening the fiscal framework is essential to improving the
macroeconomic policy toolkit. The emergence of sizable unrecorded arrears
highlights the need to strengthen budgetary execution rules and misuse
penalties as well as to streamline the recording of fiscal accounts by
limiting the use of turnkey projects and deferred payment contracts in
public investment projects.

Exiting the FATF grey list must remain a priority. Building on the momentum
of recent legislative action, the authorities should continue addressing
the deficiencies in Panama’s AML/CFT regime and legal framework identified
by the FATF. In addition, the authorities should address the shortcomings
identified in the 2019 Global Forum review on global tax transparency,
including by responding to exchange-of-information requests in a timely
manner.

The financial sector remains robust, but macrofinancial risks warrant
continued monitoring. Addressing data gaps with respect to household and
corporate balance sheets and property

prices remains a priority. Specifically, improving housing price indices
would facilitate financial-sector surveillance.

The alignment of prudential regulations with Basel III is welcome. The
authorities should focus on macroprudential tools and further upgrading the
regulatory toolkit. It will also be important to put in place robust
frameworks for crisis management, including by adequate liquidity support
for banks and enhancing the range of resolution tools available to failed
banks.

READ ALSO  IMF Executive Board Concludes 2020 Article IV Consultation with Kuwait

The fintech sector holds potential in the presence of an appropriate
regulatory framework. Adopting cybersecurity and fintech regulatory
frameworks while capitalizing on Panama’s digital and mobile connectivity
could place the country as a regional fintech hub, enhancing financial
inclusion, and lowering intermediation costs.

A reinforcement of the structural reform agenda will be necessary to
maintain high potential growth. Sustaining high rates of growth will
require continued improvements in productivity and competitiveness, a
strengthening of policies related to labor mobility, governance and
institutional capacity, and enhancing the innovation and technological
sophistication in key industries. To remain an attractive destination for
doing business, Panama needs to upgrade the skill level of its workforce,
streamline the insolvency framework and improve the functioning of the
judicial system.

Addressing social inequities is urgent. Revamping social policies is
imperative to maintain broad-based and inclusive growth and requires
strategic policy action in the areas of education, gender equality, social
protection programs, and poverty reduction in the comarcas.

Panama’s climate change mitigation strategy and commitments are welcome.
Beyond “green” energy provision, the authorities should be mindful of
natural resource preservation, especially in view of the country’s
susceptibility to extreme weather events. Most notably, the pressure for
better water management is mounting both from the expanded Canal operations
and a growing population.



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

Est.

Projections

2016

2017

2018

2019

2020

2021

Production and prices

(Percent change)

Real GDP (2007 prices)

5.0

5.6

3.7

3.0

4.0

5.0

Consumer price index (average)

0.7

0.9

0.8

-0.4

0.5

1.5

Consumer price index (end-of-year)

1.5

0.5

0.2

-0.1

1.0

2.0

Output gap (% of potential)

-0.1

0.8

0.3

-0.7

-0.9

-0.4


Demand components (at constant prices)

Public consumption

10.1

6.5

7.5

8.7

2.1

5.7

Private consumption

7.1

3.1

2.3

3.0

3.2

5.0

Public investment 1/

49.0

-20.7

7.0

-5.2

1.1

5.8

Private investment

-5.5

14.9

-0.1

-3.7

1.5

6.1

Exports

-4.3

5.0

5.0

-0.3

7.2

6.5

Imports

-4.8

4.7

2.8

-2.7

4.0

7.3

Financial sector

Private sector credit

8.4

6.5

4.5

0.2

4.6

6.6

Broad money

4.1

5.2

2.8

-0.1

4.6

6.6

Average deposit rate (1-year)

2.7

2.7

3.5

3.9

Average lending rate (1-year)

3.5

3.5

4.3

4.7

Savings-investment balance

(In percent of GDP)

Gross domestic investment

40.5

41.7

41.3

38.4

38.6

38.2

Public sector

7.8

5.9

6.1

5.2

5.0

5.0

Private sector

32.7

35.8

35.2

33.2

33.6

33.2

Gross national saving

32.7

35.8

33.1

33.2

32.0

31.9

Public sector

3.9

4.2

4.2

2.5

2.6

2.9

Private sector

28.8

31.5

28.9

30.7

29.4

29.0

Public finances
1/

Revenue and grants

22.6

22.0

21.9

20.8

20.4

20.7

Expenditure

24.8

24.2

24.8

23.4

22.8

22.8

Current, including interest

16.7

17.0

17.1

17.8

17.5

17.5

Capital

8.0

6.9

6.5

5.6

5.3

5.3

Overall balance, including ACP

-2.2

-2.2

-2.9

-2.6

-2.4

-2.1

Overall balance, excluding ACP

-2.0

-2.2

-3.2

-3.1

-2.7

-2.5

Total public debt

Debt of the Non-financial public sector 2/

34.8

34.8

36.8

41.0

42.1

42.1

External

28.5

28.7

30.5

34.9

35.3

34.7

Domestic

6.3

6.1

6.2

6.1

6.8

7.4

Debt of ACP

4.7

4.4

4.2

3.9

3.6

3.2

Other 3/

3.8

3.4

4.2

4.1

3.9

3.7

External sector

Current account

-7.8

-5.9

-8.2

-5.2

-6.1

-5.9

Net exports from Colon Free Zone

2.9

3.0

2.5

1.5

1.4

1.5

Net oil imports

3.4

3.8

4.4

3.7

2.6

2.6

Net foreign direct investment inflows

7.9

6.9

7.9

6.3

5.1

5.0

External debt

159.9

149.6

151.8

156.5

160.2

160.0

Memorandum item

GDP (in millions of US$)

57,908

62,219

65,128

66,801

69,850

74,443

Sources: Comptroller General;
Superintendency of Banks; and IMF staff
calculations.

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.


READ ALSO  Maintaining Banking System Safety amid the COVID-19 Crisis – IMF Blog


[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

The Executive Board takes decisions under its lapse-of-time
procedure when the Board agrees that a proposal can be considered
without convening formal discussions.


[3]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Maria Candia

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








Print Friendly, PDF & Email

Hold dit netværk orienteret