Panama As Seen by the IMF in March 2015

The organization is urging the Panamanian government to accelerate the measures needed to get off the gray list in order to avoid counterproductive medium-term effects on the economy.

Monday, March 16, 2015

From a press release by the International Monetary Fund (IMF):

An International Monetary Fund (IMF) mission, headed by Luca Antonio Ricci, visited Panama City during March 3-13 to conduct the country’s annual Article IV consultation, part of the IMF’s regular surveillance of all member countries. At the end of the discussions, Mr. Ricci issued the following statement:
The IMF staff’s baseline projections are favorable, with balanced risks. The policy discussion was centered on the importance of strengthening the financial and fiscal policy framework, building policy buffers, as well as continuing reforms geared towards securing sustainable and inclusive growth.
Panama’s economic performance is expected to remain strong
1. IMF staff’s baseline projections are favorable, with the highest growth in Latinamerica, low inflation, improving public finances, and a declining current account deficit.
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 (Minera Panama) 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. The authorities have taken advantage of falling oil prices to lower electricity subsidies and adjust tariffs. Inflation is expected at around 1½ 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 4.1 percent of 2007-base GDP. Revenues failed to pick-up but current primary expenditures grew by 13 percent. Going forward, a special provision in the Social and Fiscal Responsibility Law (SFRL) allows the fiscal deficit to exceed the SFRL ceilings up to the amount that budget contributions from the Canal are below 3.5 percent of GDP. In line with this special provision, the 2015 fiscal deficit is budgeted at 3.7 percent of GDP in order to accommodate past commitments on capital expenditures as well as a projected weak revenue performance.


Debt of the Non-Financial Public Sector increased to 39.5 percent of GDP in 2014, but is projected to move onto a declining path in 2016.


The current account deficit remained elevated in 2014, at 11.4 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).
2. The new administration is pressing ahead with the policy agenda. The authorities released a five-year strategic plan designed in consultation with the private sector and within the fiscal constraints of the existing SFRL. The plan should catalyze investment and support growth in key sectors, while promoting socio-economic developments, in part by enhancing the education system, social programs, and labor markets.
Near-term risks mostly relate to a weaker global economy or to possible delays in enhancing financial transparency
3. Strong integration within the global trade and financial system brings substantial benefits to Panama, but also makes it vulnerable to external shocks. 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.
4. The potential negative impact from inadequately tackling financial transparency shortcomings could be significant. In February, the Financial Action Task Force (FATF) recognized steps being taken to address deficiencies in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, and indicated that the authorities should continue pressing ahead with their work agenda. While there may be short-term adjustments associated with complying with international transparency requirements, the longer term benefits of having a financial sector grounded in transparency are expected to be positive. Delaying reforms to financial transparency could restrict access to global capital and the international payments system with negative implications for the economy.
The most immediate priority is to strengthen financial integrity
5. Given the risks to Panama’s economy, it is imperative to swiftly bring the financial integrity framework in line with the international standard. After the FATF identified Panama as having strategic AML/CFT deficiencies in 2014, maintaining some correspondent banking relationships and conducting some international transactions has become more challenging, although with modest overall impact so far. The authorities are clearly committed to implementing the recommendations of the IMF AML/CFT assessment and the action plan agreed with the FATF. The cabinet is in the process of approving the draft Law. It is crucial to gather full political support to pass as soon as possible legislation through the National Assembly in order to meet the international standard.
The medium term fiscal framework needs to be revisited
6. Strengthening the medium-term fiscal framework is a priority. The repeated revisions to the SFRL deficit ceilings and the potential for overspending allowed by the special provision leave Panama without a robust fiscal anchor. The authorities should refrain from changing the SFRL ceilings and should review the special provision. To further strengthen the fiscal framework, the authorities should consider lowering the level and broadening the definition of the net debt target that is embedded in the SFRL. Indeed, exposures to shocks and contingent liabilities, large unfunded future pension liabilities, and the temporary financing needs of a liquidity facility to backstop the banks argue for larger fiscal buffers. The net debt definition could be broadened to include for example other outstanding public liabilities and liquid public financial assets. Finally, to ensure the revised SFRL is binding, a more explicit accountability framework will also need to be put in place.
7. Policy efforts should be devoted to raising tax revenues and streamlining current expenditures. An increase in revenues could be achieved by strengthening tax collection and reviewing tax policy, so as to rely less on tax amnesties. The newly established Direccion General de Ingresos (DGI) should continue its efforts to expand capacity and enhance efficiency. Addressing the unfunded pension liabilities will require not only public funding but also reforming the pension system. The planned revision of the electricity subsidies is a positive step, and more broadly the targeting of subsidies should be improved.
8. The authorities should take advantage of the declining international food and fuel prices in order to phase out price controls by mid-year. Concerns over the non-competitive behavior of food retailers—a principal motivation for the price controls—should be tackled, if needed, through the existing anti-trust framework.
Financial sector reforms are on a positive trajectory
9. The authorities are enhancing financial sector regulation and taking measures to strengthen macroprudential surveillance. Following the adoption of stricter loan classification rules and of countercyclical provisioning, the Superintendency of Banks (SBP) has taken steps to align capital regulation with the Basel III framework and to require minimum capital for financial holdings. A conglomerates law improves governance, reduces risk by limiting cross-ownership, and enhances supervisory capabilities of the SBP. The SBP has started to monitor house price developments and intends to expand its oversight to household indebtedness so as to better assess borrowers' payment capacity and potential credit risks. The SBP also has plans to upgrade the regulations on liquidity and market risk and to publish an enhanced financial stability report on a semiannual frequency.
10. The authorities need to remain vigilant, and undertake further steps to fully implement the 2011 Financial Sector Assessment Program (FSAP) recommendations. The size and openness of the financial sector make it vulnerable. It is therefore essential to enhance the ability to monitor and assess idiosyncratic, systemic, and external risks in the financial sector, including by collecting more information on commercial real estate prices and on corporate leverage. Moreover, a key priority ahead will be to create a facility for the provision of temporary liquidity to banks. There is also a need to build a macroprudential policy framework and continue developing the corresponding tools, for example to mitigate adverse developments in the real estate sector. A deposit insurance scheme for small deposits would protect the majority of depositors, mitigate the risk of runs, and complement social protection policies. Modernizing legislation on Insurance companies, Cooperatives, Trust Funds, and Public Accountants will improve the regulation, supervision, and accountability of these entities.
Ensuring a sustainable and inclusive growth path
11. Sustaining future growth will require steady improvements in training, education, and health care. Economic growth has facilitated important progress in poverty reduction over the past decade. Going forward, capital accumulation in the public sector is expected to decelerate, and growth will need to depend much more on raising productivity. It will be essential to continue efforts on improving the quality of public education and health, addressing skill mismatches, promoting greater female labor force participation, and strengthening institutions. Doing so will enhance human capital, reduce skills shortages and youth unemployment, improve the business environment, as well as raise productivity and living standards.
The mission would like to thank the Panamanian authorities for their kind hospitality, excellent cooperation, and candid discussions.

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