Washington, DC: On June 14, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Panama. [1]

Panama’s economy contracted sharply in 2020 amid reduced mobility and measures to deal with the COVID-19 pandemic, as well as the global recession. Real GDP growth contracted an unprecedented 17.9% in 2020, and the unemployment rate rose sharply to 18½% in September 2020. A large loss of income due to foreclosure and associated demand effects has also precipitated a marked deterioration in the fiscal position, while COVID -spending on health and social programs was more than offset by a shift in other spending. The fiscal deficit of the non-financial public sector reached around 10% of GDP, but remained in line with the amended fiscal rule. The external current account improved to reach a surplus of 2⅓% of GDP in 2020, thanks to a sharp contraction in imports, lower oil prices, as well as increased copper exports and the resilience of channel revenues. The financial sector has remained stable, well capitalized and liquid despite the significant pandemic shock and the moratorium on the service of bank loans. Panama remains on the gray list of the Financial Action Task Force (FATF). While the FATF acknowledged the measures taken by the authorities to improve the AML / CFT regime during the recent Plenary in February 2021, progress has not been sufficient to remove Panama from the list of countries with strategic deficiencies. . The FATF noted that the deadlines for implementing all elements of the FATF Action Plan have expired and encouraged Panama to address the remaining gaps as soon as possible.

While a strong recovery is expected for 2021, the balance of risks remains on the downside. Growth is expected to return to 12% in 2021 and converge towards its potential of around 5% in the medium term. However, the economic outlook continues to be subject to an unusual degree of uncertainty resulting from the impact of the pandemic. Downside risks at the national level include delays in processing the elements contained in the FATF action plan and improving the effectiveness of the AML / CFT regime and tax transparency frameworks; increase in bad debts of the moratorium on the service of bank loans; setbacks in fiscal consolidation that undermine market confidence. External risks include new pandemic waves and persistent weaknesses in global trade that reduce traffic flow and channel revenues. In addition, natural disasters and extreme weather events could lead to loss of lives and livelihoods, and disrupt canals, agriculture and tourism.

Board assessment [2]

The executive directors largely agreed with the direction of the staff appraisal. Panama experienced a sharp economic contraction in 2020 amid strict containment measures and mobility restrictions to combat the COVID-19 pandemic. A rebound in the global economy and favorable macroeconomic policies are expected to support a strong recovery in 2021. Directors welcomed the authorities’ commitment to protect the health and lives of Panamanians through an immunization program. They stressed the need to remain cautious as global uncertainties persist, especially with the emergence of new strains of COVID-19.

Directors stressed the importance of respecting the fiscal rule to ensure medium-term debt sustainability. The fiscal consolidation effort envisaged after the pandemic should be accompanied by a strengthening of medium-term planning. Directors stressed the need to strengthen the fiscal framework to improve the credibility of the fiscal strategy and refine the public financial management framework to enhance transparency and prevent the recurrence of arrears.

Panama’s banking system has remained resilient during the pandemic and is generally well regulated. However, the financial system remains vulnerable to unforeseen shocks. Close supervision and surveillance are necessary to preserve stability. Directors stressed the need to curtail and phase out regulatory forbearance on loans following the pandemic, reinforced by a prudential action plan and close monitoring. The ad hoc provisioning requirement on modified loans should be continually recalibrated as circumstances change. Given the large share of modified loans, a review of all banks’ risk-based loan portfolios, including an assessment of fundamental asset quality, would help assess credit exposures and capital buffers of banks. banks.

Directors stressed the importance of improving the financial integrity framework. Exiting the FATF gray list must remain a priority, in particular by rapidly remedying the remaining gaps in the AML / CFT regulatory framework. Efforts to further improve tax transparency must continue, in close cooperation with the European Union.

Directors called for structural reforms to enhance competitiveness and growth potential through improving the business climate, strengthening policies related to labor mobility, governance and institutional capacity. , improving innovation and technological sophistication in key sectors and deepening financial inclusion. There is also a need to improve skill levels of the workforce, streamline the insolvency framework and improve the functioning of the court system to remain an attractive destination for doing business. Directors welcomed the long-term goals of improving the efficiency of spending, especially in the areas of health, education and social affairs, including improving the living conditions of indigenous populations.

Table 1. Panama: Selected economic and social indicators

Population (millions, 2020) 4.3

Poverty line (percent, 2017) 20.7

Population growth rate (percent, 2020) 1.4

Life expectancy at birth (years, 2018) 78.3

Total unemployment rate (September 2020) 18.5

Adult literacy rate (percent, 2018) 95.4

GDP per capita (USD, 2020) 12,373

IMF quota (SDR, millions) 376.8

Is.

Projections

2017

2018

2019

2020

2021

2022

Production and price

(Percent change)

Real GDP (2007 prices)

5.6

3.6

3.0

-17.9

12.0

5.0

Consumer price index (average)

0.9

0.8

-0.4

-1.6

0.2

1.1

Consumer price index (end of year)

0.5

0.2

-0.1

-1.6

0.5

2.0

Production gap (% of potential)

2.4

4.4

7.3

-14.2

-6.3

-4.3

Components of demand (at constant prices)

Public consumption

6.4

7.7

4.5

19.1

6.2

-11.2

Private consumption

3.1

2.3

3.6

-15.7

12.3

4.5

Public investment 1 /

-20.7

6.9

-1.6

-19.7

4.0

3.0

Private investment

14.9

-0.4

-2.8

-40.0

33.7

12.4

Exports

5.0

5.1

-0.1

-28.3

15.3

11.0

Imports

4.3

4.1

-3.3

-34.0

34.0

6.5

Financial sector

Credit to the private sector

6.5

4.5

2.4

-2.6

12.3

6.1

Broad money

5.2

2.8

2.3

9.5

15.2

7.1

Average deposit rate

1.6

1.8

2.1

1.9

1.6

1.6

Average borrowing rate

7.9

7.7

7.9

7.8

6.2

6.2

(As a percentage of GDP)

Savings-investment balance

Gross domestic investment

41.7

41.5

39.3

28.5

32.5

34.3

Public sector

5.9

6.2

6.0

5.3

5.0

4.9

Private sector

35.8

35.3

33.2

23.2

27.6

29.5

Gross national savings

35.8

33.8

34.3

30.9

29.1

31.0

Public sector

4.2

4.2

2.7

-4.1

-2.8

1.2

Private sector

31.6

29.6

31.6

35.0

31.9

29.8

Public finances 1 /

Revenue and grants

22.0

22.0

20.9

21.8

22.6

23.1

Spent

24.2

24.9

24.1

30.7

29.3

26.4

Current, including interest

17.0

17.2

17.6

25.3

24.4

21.6

Capital city

6.9

6.6

5.8

5.3

5.0

4.9

Overall balance, including ACP

-2.2

-2.9

-3.2

-8.9

-6.7

-3.3

Overall balance, excluding ACP

-2.2

-3.2

-3.6

-10.1

-7.4

-4.0

Total public debt

Non-financial public sector debt 2 /

35.3

37.3

42.2

64.0

62.9

62.5

External

28.7

30.6

35.3

55.1

54.2

54.4

National

6.6

6.7

6.9

8.9

8.7

8.1

CPA debt

4.4

4.2

3.8

4.3

3.5

2.9

Other 3 /

3.4

4.2

4.1

5.2

4.6

4.4

External sector

Current account

-5.9

-7.6

-5.0

2.3

-3.4

-3.3

Colon free zone net exports

3.0

2.5

2.7

3.2

2.7

2.8

Net petroleum imports

3.8

4.4

3.8

1.6

2.2

2.1

Net inflows of foreign direct investment

6.9

7.6

5.5

1.2

4.0

6.4

External debt

149.6

153.0

156.8

201.9

186.3

185.3

Memorandum Articles:

GDP (in millions of US $)

62 203

64 928

66 788

52 938

59,447

63 084

Sources: Comptroller General; Superintendence of Banks; and staff calculations.

1 / Includes the Panama Canal Authority (ACP). Includes staff adjustment to account for the accumulation of previously unrecorded expenses for 2017-18.

2 / Non-financial public sector according to the definition of Law 31 of 2011.

3 / Includes the debt of public enterprises outside the national definition of NFPS (ENA, ETESA and AITSA) and non-consolidated agencies.


[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of employees visits the country, collects economic and financial information and discusses with those responsible for the development and economic policies of the country. Back at headquarters, the staff prepare a report, which forms the basis for the Board of Directors’ discussion.

[2] At the end of the discussion, the Managing Director, in his capacity as Chairman of the Board, summarizes the views of the Executive Directors, and this summary is sent to the country’s authorities. An explanation of all the qualifiers used in the summaries can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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