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Measuring reserves and assessing international reserves adequacy in fully dollarized economies can be challenging. The role of international reserves may be different for these countries compared to countries with their own currencies. In addition, quantifying external risks and the opportunity costs that they face may be complex. This paper complements existing research by: first, exploring the challenges and judgements needed in measuring international reserves in dollarized economies according to country circumstances; and second, deriving a “synthetic” measure of international reserves for Panama and assessing its adequacy. As Panama does not have official international reserves, this paper proposes to use the statutory liquid assets in its banking system as its closest approximation. The paper is arranged in six parts: Section A provides an introduction. Section B summarizes the experiences of a sample of dollarized countries. Section C illustrates a stylized balance sheet of a central bank, depicting how international reserves are shown in a country with a central bank. Section Sections E discusses the liquidity buffers in Panama’s banking sector, while Section F synthesizes the illustrative measures of Panama’s international reserves to gauge reserves adequacy using the IMF metric. Section G discusses an indicator for government liquidity. Finally, section H concludes with a discussion of the policy implications.
Panama has achieved more rapid income convergence to US standards in the past 25 years than most other countries in Latin America and is now the richest country in Latin America.
1. Panama’s tax collection has been historically low, reflecting the authorities’ overarching strategy to promote an investment-friendly environment with low taxation. The level of revenue is a result of relatively low tax rates, as well as ample use of base-eroding policy measures, such as tax incentives and exemptions across all taxes, that also affect fairness and efficiency. Although low taxation could help the country achieve the policy objective of attracting investments, it leads to chronical fiscal deficits (Figure 1.1) and limits fiscal space for social inclusion policies. Even if national preferences and public choice in Panama are in favor of a small government and public sector, there is ample space to modernize the Panamanian tax regime by increasing its progressivity and transparency, reducing distortions, and aligning it with international best practices trough revenue neutral reforms. This paper presents the main features and weaknesses of the current Panamanian tax system and provides an international comparison of its performance.