Our authorities welcome the constructive dialogue with staff in preparation of the Article IV consultation and the FSAP. They also value the Fund’s technical assistance in the drafting of the sovereign wealth fund and the public-private partnership legislation. Both drafts of legislation should reach Congress by mid-2012.
Panama’s government remains engaged in mobilizing resources for its 5-year (2010–2014) public investment strategy, key social programs for the most vulnerable, and the conclusion of the Panama Canal expansion on target in 2014. Economic activity surged by about 10.5 percent in 2011 compared to 7.5 percent in 2010. This rapid GDP growth reflects the ongoing Canal expansion, other public investment programs, as well as strong foreign direct investment (FDI). Output growth is projected to remain close to 7 percent in 2012. The authorities expect that high growth will continue in the medium term despite global uncertainties.
Panama’s investment performance has been outstanding. Data reported by IMF staff indicate that public investment (including investment by the Panama Canal Authority) increased by almost 40 percent at constant prices last year, after having expanded by 34 percent in 2010. Private investment contracted in 2009 and 2010, but recovered markedly in 2011. As a result, the gross domestic rate of investment has reached 29 percent, one of the highest in the region.
Economic growth has remained broad-based. Commerce, transportation, construction, communications, storage and mining have been the most dynamic sectors. Labor markets have also improved. Open unemployment in 2011 fell to 2.9 percent compared to 4.7 percent in 2010, and 5.2 percent in 2009. Youth unemployment remains a concern, affecting mainly women.
Average CPI inflation reached 5.9 percent compared to 3.5 percent in 2010. Strong domestic demand, higher international prices in food, energy, and raw materials explain most of the increase in inflation. CPI inflation is expected to moderate to about 5 percent in 2012. The current account deficit is projected to exceed 12 percent of GDP in 2011 compared to 10.7 percent in 2010. Capital goods imports driven by the large public works will continue to exert pressure on the balance of payment on current account. However, most of the current account imbalance is covered by FDI. In the last two years, FDI has averaged nearly 9 percent of GDP, as reported by staff.
In 2011, the fiscal stance came under pressure. Panama faced massive flooding nation-wide at end-2010 with damaging effects to agriculture and infrastructure costing over US$150 million. A national emergency was declared, condition that allowed, under the Social and Fiscal Responsibility Law (SFRL), the fiscal deficit ceiling to be increased to 3 percent GDP in 2011. This freed resources to tackle flood-related public works. Nevertheless, the final result is likely to have remained well below the revised SFRL ceiling.
Revenues of the non financial public sector (NFPS) strengthened in 2011. Total revenues increased by 13 percent relatively to 2010. Tax revenues increased 11.5 percent reflecting the full impact of previous tax reforms and the VAT increase of 2 percent in mid-2010. This revenue performance and prudent spending created the fiscal space for the public investment program and poverty-related programs.
As indicated, public and private investment gained momentum in 2011. The rate of project implementation exceeded 85 percent from 77 percent in 2009. Work on the new Metro system began in 2011, and the Canal expansion is at its peak. The inner city highway system and the construction of new airports and hospitals will accelerate in 2012. FDI has flowed mainly into the expansion of ports, tourism, electricity transmission and energy infrastructure.
Panama was excluded from the OECD grey list as of last July 2011 after signing 11 double-taxation agreements (DTAs) and a tax information and exchange agreement (TIEA) with the United States. Last October 2011, in Paris, our authorities personally delivered to OECD’s Global Forum a report on the new laws to regulate the exchange of information for tax purposes. In December 2011, France’s National Assembly approved the DTA with Panama. The country will continue strengthening its legal framework on tax information exchange and intends to sign DTA agreements with other nations.
On a separate note, in mid-2011, Fitch Ratings raised Panama credit rating to BBB from BBB-. This was followed by Moody’s and Standard & Poor’s placing the country in “positive watch” for a possible upgrade in 2012. Also, last October, the United States Congress ratified the Free Trade Agreement with Panama. These developments should enhance the prospects for even larger FDI flows into Panama.
Our authorities welcomed the completion of the FSAP. The assessment reaffirms the banking sector’s strong liquidity, profitability, and high capitalization. Credit risks are low. Interbank contagion and cross-border risks to onshore banks are considered limited though close monitoring is warranted. The authorities are giving priority to actions that strengthen risk-based and consolidated cross-border supervision as well as non-bank supervision. The Superintendence of Banks is also committed to strengthening bank resolution and monitoring of systemic risks. The authorities concur that the pending AML/CFT assessment should be implemented this year by IMF staff.
Lastly, President Martinelli’s administration continues to assign priority to targeted-income support programs. These programs aim at reducing poverty and improving income distribution. In its latest survey, the Economic Commission for Latin America and the Caribbean reports that poverty levels in Panama have fallen from 33.4 percent of total population in 2009 to 29.8 percent in 2010. Panama ranks 58 among 187 countries in the United Nations Human Development index. The country ranks 1st in Central America and 9th in Latin America. The government of Panama is determined to continue to expand targeted-income support programs, and to intensify technical training to improve competitiveness and help lift untrained adults out of poverty.
Statement by Nogueira Batista, Exective Director for Panama and Mr. Alfred Maciá, Advisor to the Executive Director, February 22, 2012
- International Monetary Fund
- Published Date:
- April 2012
Show Summary Details