Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission


Panama: Staff Concluding Statement for the Virtual 2021 Article IV Consultation Mission

May 17, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC:

An International Monetary Fund team led by Alejandro Santos held
virtual discussions with the Panamanian authorities in the context of
the 2021 Article IV consultation in the period April 19-30, 2021. The
team met with the Minister of Economy and Finance Hector Alexander,
Banks Superintendent Amauri Castillo, as well as other senior public
officials and private sector representatives.

Panama’s economy experienced a pronounced contraction as output fell by
17.9 percent in 2020 amid stringent containment measures and mobility
restrictions to tackle the COVID-19 pandemic. A rebound in the global
economy and supportive macroeconomic policies, have helped underpin a
recovery in Panama. The outlook for 2021 is optimistic although the
continuing global uncertainty, particularly from the emergence of new
COVID-19 strains, could tilt the balance of risks to the downside. As
an insurance against these potential extreme external shocks, Panama

a two-year

Precautionary and Liquidity Line arrangement, which was approved by the
IMF Executive Board in January 2021, amounting to 500 percent of quota,
equivalent to US$2.7 billion. The government’s priority is to protect
lives and health of its people through a vaccination program that
facilitates the sustainability of the economic reopening and to provide
continuity to the public policies that would support the economic
recovery and reinforce social reforms to ensure sustainable and
inclusive growth. As the recovery gathers pace, it is important to
reinforce fiscal sustainability by adhering to the Social and Fiscal
Responsibility Law. To fortify financial stability, a detailed analysis
of the quality of banks’ loans, once the moratorium expires, would help
underpin banks’ credit exposures and capital buffers. The authorities
remain firmly committed to exiting the FATF grey list by strengthening
the AML/CFT regime to enhance Panama’s position as a regional financial
center. Finally, further improvements to the national statistics will
ensure adherence to global standards in data quality and dissemination.

Headwinds from the pandemic had led to a sharp economic contraction in

  • Pronounced output fall
    . After several decades of economic dynamism, real GDP contracted by
    17.9 percent (y/y) in 2020 due to mobility restrictions to contain the
    pandemic. Following the slump in the second quarter, the economy
    recovered vigorously in the second half of 2020 but not enough to
    compensate for the fall in the first half. The unemployment rate more
    than doubled from 7 percent in August 2019 to 18½ percent in September
  • Subzero inflation
    . CPI inflation remained persistently below zero in 2020, reflecting
    weak demand. After dropping by as much as -2.5 percent (y/y) in May,
    inflation closed the year at -1.6 percent (y/y).
  • Widened fiscal deficit
    . The NFPS fiscal deficit rose from 3½ percent of GDP in 2019 to 10
    percent of GDP in 2020 due to the operation of automatic stabilizers as
    GDP fell sharply, while COVID-19 related spending was broadly offset by
    cuts in other expenditure. The 2020 fiscal outcome was in line with the
    amended Social Fiscal Responsibility Law (SFRL) which sets deficit
    objectives on a gradual fiscal consolidation path until the NFPS
    deficit reaches 1½ percent of GDP from 2025 onwards. Public-sector debt
    rose from 42¼ percent of GDP in 2019 to 64 percent of GDP in 2020 due
    to a sharp fall in GDP and an absolute increase in the public debt.
  • Improved external position
    . The current account balance switched to a surplus of about 2¼ percent
    of GDP in 2020 (from a deficit of 5 percent of GDP in 2019) on the back
    of a sharp contraction in imports, lower oil prices, increased copper
    exports and resilient Canal revenues. The current account surplus
    together with other capital inflows led to an accumulation of
    international reserves.

Tailwinds from the global recovery fuels optimism for 2021, but
downside risks remain

  • Sharp economic recovery underway.
    The economy is projected to grow 12 percent in 2021 as economic
    activities recover, boosted by the vaccination rollout and full-scale
    copper production, a recovery in private investment, and a large
    carryover effect. Over the medium term, growth is expected to stabilize
    at its potential growth rate of 5 percent. Inflation is expected to
    pick up to ½ percent in 2021 amid accelerating economic activity and
    stabilize at 2 percent in the medium term. Meanwhile, the external
    position is projected to deteriorate temporarily in 2021 to a current
    account deficit of about 3½ percent of GDP amid pent-up demand for
    imported durable goods, followed by stronger export receipts in the
    medium term, reducing the current account deficit to 2½ percent of GDP
    over the medium term. The fiscal balance is expected to gradually
    improve—in line with the amended fiscal rule—with the NFPS deficit
    narrowing to 7½ percent of GDP in 2021 and to 1½ percent from 2025


  • Balance of risks tilted to the downside.

    Key risks to growth are related to setbacks in the global recovery from the
    COVID-19 pandemic, which could lead to disruptions in global trade and
    capital flows, accelerating deglobalization, negatively impacting the
    activity of the Canal and logistics sectors. Domestic risks include a lack
    of progress on exiting rapidly the FATF grey list which may expose Panama
    to reputational damage. In addition, cyberattacks could disrupt digital
    infrastructure, while more frequent and severe climate-change related
    natural disasters could adversely affect Canal activity, agriculture, and
    tourism. On the upside, the pandemic could be curtailed faster than


    Observance of the fiscal rule will ensure debt sustainability

    • The envisaged post-pandemic fiscal consolidation effort should
      be accompanied by a strengthening medium-term fiscal planning

      The modified fiscal rule accommodates the pandemic shock by allowing
      the operation of automatic stabilizers while providing the necessary
      flexibility to gradually withdraw the emergency COVID related spending.
      Cyclical factors will facilitate the fiscal consolidation beyond 2021,
      but further improvements in tax administration and expenditure
      prioritization may be needed. The medium-term fiscal framework should
      become an essential planning tool to facilitate compliance with the
      fiscal rule and deliver the government’s policy priorities (already
      planned for the 2022 budget).

    • An assessment of the revenue potential and expenditure
      efficiency would be welcomed


      Measures to improve tax and customs administrations, enhancing public
      investment planning and budgeting, improving the efficiency of public
      spending and realigning it with social needs are important to sustain
      growth amid revenue shortfalls. Moreover, a review of Panama’s tax
      expenditure would be welcomed, particularly its complex exemptions and
      preferences system that continually erode the tax base. On the
      expenditure side, social priorities such as health and education should
      be given prominence in resource allocation, while other spending growth
      should be contained. Meanwhile, the pension system may need gradual
      measures to cement its financial viability. The tax amnesty, while
      justifiable in the pandemic environment, should be emphasized as a
      temporary program to contain public expectations of future tax
      amnesties that could weaken tax collection.

    • There is significant room for improving the public financial
      management framework.

      The authorities have made a considerable effort to strengthen public
      financial management to avoid future domestic arrears accumulation. The
      authorities should adhere to their comprehensive Action Plan while
      refining the publication of the fiscal accounts adjusted by any
      uncovered arrears. While publication of procurement information has
      improved significantly, budget execution and fiscal reports should
      facilitate information on COVID-19 spending, publish audits, and
      reflect in-year reallocations of resources towards this area.

    Improvements to the financial integrity framework should continue

    • Exiting the FATF grey list must remain a priority.

      With the original timelines for addressing the items on the Financial
      Action Task Force (FATF) Action Plan now passed, the authorities need
      to expediently address the remaining deficiencies in Panama’s
      Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)
      regulatory framework identified by the FATF. Specifically, remaining
      action items include strengthening the understanding of the risk of
      money laundering and terrorist financing (ML/TF) of the corporate
      sector and implement the respective policies to mitigate the risk;
      improve oversight and sanctions for AML/CFT-related violations; ensure
      the verification of up-to-date information on beneficial owners of
      legal entities and continue to demonstrate progress in ML criminal
      investigations involving foreign tax crimes.

    • Efforts to further enhance tax transparency should continue.

      Despite efforts to comply with international standards on transparency,
      the European Union (EU) kept Panama on the blacklist of non-cooperative
      jurisdictions for tax purposes in February 2021. The authorities are
      encouraged to work closely with the EU authorities to resolve this

    Intensifying financial sector oversight and additional measures will
    bolster resilience

    • Restricting and phasing out forbearance is necessary as the
      pandemic recedes

      To provide relief to borrowers affected by the pandemic, the
      authorities established a moratorium on loans until December 31, 2020,
      and allowed an extended period for loan modification through June 30,
      2021. Considering the elevated credit risk from restructured exposures,
      the Superintendency of Banks of Panama (SBP) has advised banks to
      increase their provisioning beyond the level required during normal
      times and may re-assess the adequacy of such provisions ahead of the
      expiry of the moratorium. Any regulatory forbearance of this nature
      should be restricted to the stipulated categories and a specific
      timeframe should be adopted for phasing it out, with close monitoring
      and a supervisory action plan. Given the large share of modified loans
      arising from the moratorium, a risk-focused examination of banks’ loan
      portfolio, including an assessment of fundamental asset quality, once
      the pandemic recedes would help ascertain banks’ credit quality and the
      adequacy of their capital buffers.

    • Over the medium term, there is a need to upgrade the regulatory
      framework, enhance macroprudential tools, and develop capital

      As the current sanitary emergency is resolved, there will be a need to
      fortify financial stability by formalizing a crisis management plan,
      implementing capital conservation buffers, introducing additional
      capital requirements for systemically important banks, and enhancing
      the macroprudential policy toolkit with a view to guard against risks
      in the real estate sector and to bank clients’ indebtedness. At the
      same time, advancing the development of the domestic capital market
      would enhance the sources of financing and prospects for higher and
      more inclusive growth. Establishing a roadmap, which identifies clear
      vision for the industry, improvements in infrastructure (custody,
      clearing, and trading), and market oversight and regulatory supervisory
      capacity would foster the development of Panama’s capital markets to
      help meet the needs of the government and various domestic agents.

    Addressing structural needs and social priorities is vital

    • Implementation of structural measures will be key to enhancing
      competitiveness and growth potential.

      Raising productivity and returning to high rates of growth
      will require continued improvements in Panama’s business climate, a
      strengthening of policies related to labor mobility, governance and
      institutional capacity, enhancing the innovation and technological
      sophistication in key industries, and deepening financial inclusion
      through more targeted measures. 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.

    • Closing socioeconomic gaps widened by the pandemic will require
      decisive policy action.

      To achieve the government’s long-term goals, consideration should be
      given to enhancing the quality of social spending, most notably
      education spending, and prioritizing country-appropriate and
      fiscally-sustainable strategies to reduce inequality, improve the
      living conditions in the comarcas (areas inhabited by indigenous
      populations), and enhance women’s economic opportunities.

    • Improving data dissemination practices will enhance Panama’s
      data transparency

      . Improving the timeliness, periodicity and coverage of a few data
      categories in line with the Special Data Dissemination Standard (SDDS)
      requirements will support better surveillance and benefit data users.
      The planned strengthening of the National Statistical Council will
      foster coordination among data producers and data users.

    The mission would like to thank the Panamanian authorities for their
    excellent cooperation and candid and open discussions.

IMF Communications Department

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: [email protected]


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