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Panama: Selected Issues

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
November 2016
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Assessing The Effectiveness Of Panama’s Fiscal Framework1

Panama adopted a rule-based fiscal framework in 2008. This law, its subsequent amendments, other related laws and by laws defined a rule-based fiscal framework. The implementation of the fiscal framework, however, revealed certain challenges. This note assesses the scope for improving the design and implementation of the fiscal framework in light of best practices.

A. Evolution of the Fiscal Framework

1. A Social and Fiscal Responsibility Law (SFRL) was approved by the National Assembly in June 2008 (Law 34 of June 2008) and became effective in January 2009. The law aimed to institutionalize fiscal discipline and debt sustainability, by setting a fiscal rule that limited the deficit of the Nonfinancial Public Sector (NFPS) to 1 percent of GDP and an indicative target for the NFPS net public debt of 40 percent of GDP to be attained by 2015.

2. The SFRL built in some room of flexibility. A temporary suspension of the deficit ceiling would be initiated in the event that domestic real GDP growth slows to 1 percent or less. In these circumstances, the NFPS deficit would be allowed to increase up to 3 percent of GDP in the current year, 2 percent in the following year, and would need to return to the long-run limit of 1 percent afterward.

3. The SFRL law was modified in June 2009 to allow for a timely countercyclical policy against external shocks. Panama was significantly impacted by the global financial crisis in 2009. Growth slowed substantially, although not enough to qualify for a temporary suspension of the deficit ceiling. On June 26, 2009, Law 32 modified the escape clauses to provide more scope for countercyclical policy. The modified SFRL provided a temporary suspension of the deficit limit in three cases:

  • (i) a national emergency declared by the government;

  • (ii) a slowdown in domestic GDP growth to 1 percent or less for two consecutive quarters; and

  • (iii) a slowdown in world GDP growth to 1 percent or less for two consecutive quarters (or a two quarter average growth of less than 1 percent) and the average rate of growth of GDP in Panama is of 5 percent or less during six consecutive months.

The NFPS deficit ceiling was permitted to increase up to 3 percent of GDP in the case of a national emergency or a domestic growth shock and 2½ percent of GDP in the case of a world growth shock in the first year after the shock, with the adjustment back to the 1 percent deficit distributed over 4 years (instead of 3 years) for all three cases. Furthermore, if the deficit in the first year turned out less than the maximum allowed, the difference could be carried over to the following year, to a maximum deficit in the second year of 3 percent of GDP for national emergency or a domestic growth shock, and 2½ percent of GDP for a world growth shock.

4. Since these modifications, the escape clauses were used twice: in 2009 due to global economic slowdown and in 2011 due to a national emergency. Accordingly, the deficit ceilings of 2009 and 2011 were raised from 1 percent to 2½ percent and 3 percent of GDP, respectively. However, the additional fiscal room was not fully utilized as the actual fiscal deficits turned out to be smaller than the maximum allowed by the modified deficit ceilings.

5. The fiscal framework was revamped by the law establishing the Fondo de Ahorro de Panama (FAP, the Panamanian sovereign wealth fund) in 2012. The FAP Law (Law 38 of 2012) specified a revised fiscal consolidation path that reduced the deficit limit from 2.9 percent of GDP in 2012 to 0.5 percent in 2018 and thereafter.

Table 1.Deficit Ceilings as Percent of GDP Provided by Law
2009201020112012201320142015201620172018
SFRL Law 20081111111111
FAP Law 20122.92.82.721.510.5
Actual NFPS Deficit 10.91.71.91.52.33.22.82

Percent of 2007-base GDP.

Preliminary. The ceiling of 2 percent of GDP of 2015 applies to the adjusted fiscal balance instead of the overall fiscal balance.

Percent of 2007-base GDP.

Preliminary. The ceiling of 2 percent of GDP of 2015 applies to the adjusted fiscal balance instead of the overall fiscal balance.

6. It also introduced a mechanism to mitigate the impact of potentially volatile canal contributions on budget expenditure. Canal revenue mainly consists of fees per tonnage of transit and dividends to the state as its owner and is to a large extent dependent on world trade developments and behavior of the shipping industry, which are beyond the control of the national authorities. The Panama Canal Authority (ACP) has an independent board that decides on the contribution to the budget after making provisions for future maintenance and investments. At the time the framework was revamped, the canal expansion was on-going and was expected to become operational in 2014. The projected canal contribution to the treasury was around 4 percent of GDP. In order to avoid the volatility of canal contributions affecting government expenditure, any canal contributions above 3.5 percent of GDP would be saved in the FAP starting in 2015. Conversely, the overall fiscal deficit would be allowed to expand by any shortfall of canal contributions to the budget below 3.5 percent of GDP. Thus, the NFPS deficit ceilings stipulated in the SFRL would apply to the adjusted fiscal balance:

Adjusted Fiscal Balance = Fiscal Balance - (Canal Contribution-3.5 percent)

7. The 2012 FAP law also modified the conditions under which escape clauses could be used and eliminated the possibility of carry-over. Temporary suspension of deficit ceilings can be used in the following cases:

  • (i) National emergency declared by the Cabinet. In this case the maximum additional deficit cannot exceed 1.5 percent of GDP in the year the emergency occurs or the cost associated with the emergency, whichever is less. This escape clause was triggered in 2013 with the cost of the emergency amounting to less than 0.5 percent of GDP. A supplementary budget and its associated higher deficit ceiling was approved for 2013 to cover the additional expenditure needs caused by natural disaster.

  • (ii) Economic deceleration—GDP grows 2 percent or less during two consecutive quarters. In this case, the maximum additional deficit allowed is scaled to the magnitude of the deceleration but capped at 2 percent of GDP. The return to the ceiling should be achieved by the third year with ⅓ of the needed adjustment in each year. The waiver may be maintained for three consecutive years only as long as the rate of growth of real GDP remains below 2 percent.

8. The deficit ceilings have also been changed through one-off amendments to the Law. In 2014, due to overspending in the first half of the year, an amendment of the SFRL deficit ceiling was requested by the administration that took office in July and approved by the National Assembly.

Chart 1.Deficit Ceilings as % of GDP

(Percent, annual)

Sources: Panama National Authorities; and IMF staff estimates.

B. Key Characteristics of Well Designed Fiscal Framework

9. Well-designed rule-based fiscal frameworks share a core set of critical components. Rule-based fiscal framework is defined as a mechanism placing some constraints on fiscal discretion through numerical limits. Fiscal rules can be commitment devices to make deviations from socially desirable targets too costly for policymakers. They can also be signaling tools to help policymakers signal their genuine commitment to sustainable and stabilizing policies. They can also serve to anchor expectations, thus reducing uncertainties and risk premia. Well-defined rule-based fiscal framework are characterized by the following features:

  • Clear and simple set of operating fiscal variables, including numerical target or ceiling (or a combination thereof) defined in terms of a specific fiscal indicator (or a combination thereof); a clear definition of the fiscal objectives or challenges the rule aims at addressing, which should be consistent with other macroeconomic policies; and an unambiguous and stable link between the numerical targets or ceilings and the ultimate fiscal objectives.

  • Sufficient flexibility to respond to shocks. The rule should provide ex-ante sufficient room for a stabilizing fiscal response and a gradual adjustment to the fiscal targets, while avoiding procyclicality and preserving credibility.

  • Clear and well-designed institutional arrangements. They include effective management and monitoring mechanisms, transparency and accountability provisions, and enforcement procedures.

C. Assessing the Fiscal Framework of Panama

10. The fiscal framework of Panama has played an important role in enhancing fiscal discipline since its establishment in 2009. Since the current fiscal framework became effective in 2009, the primary balance and debt-to-GDP ratio of the NFPS on average have improved significantly compared with those in 2000–2008. The fiscal impulse given the output gap also shows that fiscal policy has been less pro-cyclical in 2009–2015 than in 2001-2008.

Chart 2.Fiscal Impulse

Table 2.Comparison of Fiscal Policy Stance(as percent of GDP)
2000-20082009-2015
Average NFPS Fiscal Balance 1/−1.5−2.0
Average NFPS Primary Balance−5.8−0.2
Average NFPS Structural Balance 2/−5.9−0.2
Average NFPS Debt60.239.4

In 2000-2008, budget relied heavily on one-off privatization proceeds, resulting in better overall fiscal balance but worse primary and structural balance.

Cyclically adjusted primary balance.

Source: Panama National Authorities and IMF Staff calculation.

In 2000-2008, budget relied heavily on one-off privatization proceeds, resulting in better overall fiscal balance but worse primary and structural balance.

Cyclically adjusted primary balance.

Source: Panama National Authorities and IMF Staff calculation.

Clarity

11. The fiscal framework contains many of the essential elements of a well-designed rule-based fiscal framework. In particular, the fiscal framework in Panama consists of a relatively clear and simple set of operating fiscal variables. The fiscal rule provides ceilings on the path of the operating variable in the medium term, initially defined as the fiscal deficit of the NFPS, and starting in 2015, the adjusted deficit of the NFPS. The path of the deficit ceilings in the medium-term indicated the government’s intention to consolidate the fiscal stance over time.

12. However, the limit on the adjusted balance is based on an overestimation of the canal revenue and therefore leads to a permanent deficit bias. Starting in 2015, the deficit ceiling would apply to the adjusted fiscal deficit instead of the overall fiscal deficit. Due to delays of the canal expansion project, the faster than anticipated output growth and the GDP rebasing2, the canal contributions are now projected to be only about 2.5-3 percent of GDP in the medium term instead of 4 percent. It is unlikely that canal revenue contribution would reach 3.5 percent of GDP in the foreseeable future. The misalignment between the threshold and the projected revenue contribution from the canal allows a permanently looser fiscal position than originally intended while eliminating the opportunity to save in the sovereign wealth fund.

13. The adjusted balance is significantly less transparent. Unlike the overall fiscal balance, the economic significance of the adjusted balance—in particular, when the threshold is misaligned with plausible estimates of canal contributions—is less well-understood. With the additional fiscal room, the overall fiscal deficit is now expected to be about 1 percent of GDP higher per year than originally envisaged. Although medium-term fiscal policy entails a consolidation of about 2 percentage points of GDP in five years, the link of adjusted fiscal deficit with the debt ratio cannot be clearly established.

14. A clearly–defined medium-term fiscal anchor would help strengthen the fiscal framework. The SFRL established reducing the net debt of the NFPS to no more than 40 percent of GDP as the “indicative target”.3 This objective, however, is not supported by enforcement mechanisms, which may weaken the compliance incentive. On the other hand, there is strong incentive for Panama to maintain its investment grade as the country has benefited significantly from the lower financing cost in recent years. Net debt is defined as NFPS gross debt net of the assets of the sovereign wealth fund. The definition of net debt does not encompass a range of relevant government assets and liabilities. In this regard, an assessment of the consolidated assets and liabilities of the public sector and an analysis of selected contingent liabilities would help ensure the debt target is consistent with maintaining adequate buffers, especially in the context of a dollarized economy.

15. Within the deficit ceiling, the composition of expenditure could have different economic implications. Public sector investment has been an important driver of growth in 2007-2013 but started to contract in 2014 while current expenditure kept growing at faster rates than nominal GDP. A rapid increase in current expenditure that leads to a prolonged contraction of capital expenditure, in order to meet deficit ceilings, could hurt growth and productivity in the long run.

Box 1.Optimal Debt Level

Economic theories indicate a range of factors that could impact optimal debt. These include: the relationship between growth and interest rates, demographic trends, the distortionary effects of different taxes, the parameters of the government’s intertemporal social welfare function (in particular, the degree of aversion to risk and inequality across generations), the type and extent of market failures, the degree to which consumers are forward-looking, the size and distribution of shocks, and whether government expenditure is either permanent/structural or temporary. But theory does not indicate which of these factors are most important.

Most theoretical models of optimal fiscal policy imply movements in debt ratio in response to shocks which are not related to the business cycle. A justification for aiming for stable level of debt over the cycle may be credibility: a target value for the debt-to-GDP ratio which is stable may make monitoring easier and hence improve its credibility. For developing and emerging economies, 40 percent is often suggested as the prudential limit for debt-to-GDP ratio.

Flexibility

16. The fiscal framework includes escape clauses that provide flexibility to deal with shocks beyond the authorities’ control. The circumstances under which the fiscal balance may exceed the ceilings are specified by the SFRL, as modified by the FAP Law. The escape clauses allow a temporary waiver of the deficit limit in the following cases:

  • National emergency declared by the government. In this case, the additional deficit for the fiscal year when the emergency occurs cannot exceed 1.5 percent of GDP or the cost of the emergency, whichever is less.

  • GDP grows 2 percent or less during two consecutive quarters, based on figures published by the National Institute of Statistics and Census (INEC). The maximum amount of the waiver allowed is tiered as shown in the table. The waiver request has to be substantiated by a report prepared by the Ministry of Economy and Finance (MEF), and approved by the National Assembly.

Table 3.Maximum Waivers
GDP growthMaximum Additional

Deficit/GDP
1.1%-2.0%1.0%
0.0%-1.0%1.5%
Negative growth2.0%
Source: Law 38 of 2012.
Source: Law 38 of 2012.

When there is a temporary waiver of the maximum deficit ceiling on the basis of economic deceleration, the waiver may be maintained for a maximum period of 3 consecutive years as long as there is conclusive proof that the rate of growth of GDP is below 2 percent. The return to the ceiling should be achieved within 3 years with ⅓ of the adjustment needed:

Table 4.Timetable for Adjustment
First year of

temporary

Suspension
Second

year
Third

year
Proportion of

Adjustment
1/31/31/3
Source: Law 38 of 2012.
Source: Law 38 of 2012.

17. The flexibility embedded in the fiscal framework may give rise to unintended procyclicality of fiscal policy. The estimation of output is susceptible to identification lags. Output growth in the escape clauses refers to ex post announcement by the INEC. Since INEC does not conduct macroeconomic projections, it would not be possible to take preemptive counter-cyclical fiscal policies. On the contrary, the identification lags and possibly the consequent implementation lags inherent in the political process may result in procyclicality of the fiscal policy.

Institutional Arrangements

18. Effective institutional arrangements impact the successful implementation of a fiscal framework. They include a clear statutory basis; effective management and monitoring mechanisms to prevent and assess deviations from the numerical target or ceiling; transparency and accountability provisions to make the cost incurred by policy makers explicit if they deviate from the rule; and enforcement procedures to ensure policy makers incur costs when deviations occur.

19. Panama’s fiscal framework is supported by a relatively high level of legislation, the SFRL. Any changes, including the requests for exemptions from the deficit ceilings have to be approved by the National Assembly. The SFRL also requires that every administration adopt a strategic plan within six months of coming to office, to lay out the economic and social development strategy. The MEF has to prepare and publish each year by end-April a five-year medium-term fiscal plan with the first year corresponding to the following fiscal year to serve as the basis for the preparation of the budget which is presented to the National Assembly by end-July.

20. Transparency in forecasting and analysis is a prerequisite for effective monitoring. In Panama, the government has gone to some length to publicize and explain its fiscal rule and policy approaches to the financial market. However, key assumptions underlying the forecast are not published in the budget laws and the analytical basis for the fiscal rules has not been explained and discussed in public domain. The authorities plan to include macroeconomic analysis and assumptions in the 2018 budget documentation and the 2018-2022 medium-term fiscal plans.

21. Transparency also requires the government to apply best-practice accounting methods. The use of deferred payments schemes (“turnkey” projects) may not reflect the timing of real capital expenditure activity. The contractors of turnkey projects are responsible for obtaining financing. The budget recognizes capital expenditures when the government makes payments to contractors upon completion of their work. For example, the published fiscal result for the fourth quarter of 2015 shows an increase in capital expenditure of 141.7 percent over 2014-Q4, which largely reflects payments made to projects contracted during previous years. The effects of real public investments on the economy are difficult to gauge when the reporting does not align with the timing of actual investment activity. In addition, the deferred recognition of capital expenditure could undermine budget planning and the transparency of fiscal commitments. Starting in 2016, the government has begun publishing deferred payments, which should provide useful data for fiscal policy and economic analysis.

22. Accountability and correction mechanisms are also important institutional components of an effective fiscal framework. The SFRL requires the government to publish a detailed explanation for a failure to meet the fiscal target and the magnitude of the fiscal adjustments needed to resume compliance with the fiscal target. However, this provision is yet to be implemented. The SFRL also does not contain financial or administrative sanctions for noncompliance with the fiscal rule. The SFRL does provide that civil servants in charge of decision making, authorization or execution should be accountable for their decisions, but fails to provide implementable procedures.

23. The MEF is the main institution that can correct deviations from the numerical targets, although corrective actions are not triggered automatically. The ceilings on the deficit have been frequently suspended and amended, which indicates the relative low cost and lack of sanctions for relaxing the fiscal rule. In theory, the SFRL can prevent the submission or adoption of a budget at odds with the fiscal rule. The MEF is the main institution responsible for monitoring the implementation of the budget. It prepares monthly annual projections based on actual revenue collections and the implementation of the budget. MEF may suspend the disbursement of resources, restrict access or freeze the use of public resources to a public entity when if commits or contracts expenses not contemplated in the budget or does not comply with the requirements of the law. If during any time of the year the MEF considers that total revenues will be less than the total expenditure or that the actual payments exceed those in the budget, it will prepare a plan to contain or reduce public expenditure. However, the Law does not contemplate a trigger for the correction mechanisms to kick in.

D. Do Canal Revenues Share the Same Characteristics with Revenues from Resources?

24. The canal revenue shares little similarities with resource revenue. Resource-rich countries face unique challenges to macro-fiscal management due to the volatility and uncertainty of revenue from these resources. However, the canal revenues behave differently than revenue from resources. Although canal transit is linked with world trade development, it is less volatile than the swings in world trade volume changes.

25. The price of the canal services is less likely to experience large swings compared with commodity prices. The demand for the canal services is also less elastic to prices within a reasonable range. Canal revenue is therefore less volatile compared with revenue from natural resources and commodities.

Chart 3.World Trade Volume vs Canal Transit Growth (% yoy)

Chart 4.Panama Canal Traffic and Toll Revenue

(Indices,2011=100)

Sources: Panama National Authorities; and IMF staff calculations.

26. Even with the potential competition from alternative routes, canal revenue is not expected to be exhausted in the foreseeable future. Nevertheless, the canal revenue is likely to have macroeconomic impacts. In order to assess the macro-fiscal stance of the country, it would be helpful to complement the conventional fiscal indicators and tools with non-canal indicators to better understand the behavior of the canal revenue and its potential risks.

E. Options to Strengthen Panama’s Fiscal Framework

27. The analysis suggests that Panama’s fiscal rule would benefit from a number of adjustments. The main areas of improvements could be: (i) reviewing the rule and adjustment for canal revenue to avoid a deficit bias and protect the government’s spending capacity from volatility; (ii) avoiding unintended procyclicality; (iii) strengthening the monitoring and transparency mechanisms; and (iv) enhancing the accountability and enforcement procedures.

28. Based on the analysis of the previous sections, the mechanism to smooth government expenditure could be reviewed and updated. Given that canal revenue has not been very volatile, the fiscal rule could be reviewed to determine if it is useful to adjust the deficit ceiling for the deviation of the actual canal contribution from an estimate of the “structural” contribution. If the adjustment is warranted, the estimate of the structural canal contribution (currently 3.5 percent of GDP) could be updated. This estimate could also be updated periodically by an independent body of experts. In this regard, the Chilean experience of having an expert committee to review the price of copper may be a useful example. Adding an expenditure rule to the current fiscal deficit rule, such as by capping the annual real growth of primary current expenditures, could mimic a structural fiscal rule not only on canal revenue but on all central government revenues.

29. Unintended pro-cyclicality could be reduced. Options could include (i) enhancing the macroeconomic projection and analysis capacity; (ii) reviewing the conditions under which the escape clauses could be triggered; and (iii) adopting best practice accounting methods that better reflect expenditure commitments and the timing of investment activities.

30. The transparency mechanism could be enhanced by allowing the stakeholders more access to information. The government could improve the quality and relevance of information on budget formulation, execution and the performance under the fiscal rule. This would help educate the public and National Assembly of the budgeting process to promote a healthy and informed discussion of fiscal policy.

31. One option to foster transparency and accountability is to establish an independent fiscal agent or a fiscal council. A fiscal council is a permanent agency with a statutory or executive mandate to assess publicly and independently from partisan influence. A fiscal council can provide analytical work on government’s fiscal policies, plans and performance against macroeconomic objectives. In addition, a fiscal council can also: (i) contribute to the use of unbiased macroeconomic and budgetary forecasts in budget preparation, and (ii) facilitate the implementation of fiscal policy rules.

32. Fiscal councils therefore vary in terms of institutional models, remits, and tasks. The design of each council ultimately reflects country-specific characteristics, such as available human and financial capacities, political traditions, and the causes for excessive deficits and debts. However, all of them share the ultimate objective of promoting sound fiscal policies through independent oversight. At a minimum, a fiscal council should have a monitoring role, involving the typical tasks of a watchdog: ex-ante assessment of the consistency between fiscal plans and the objectives of the government, and analysis of long-term sustainability, and an ex-post evaluation of fiscal performance against objective and targets. In addition, a fiscal council should be mandated to perform tasks aimed at addressing specific sources of deficit bias.

Table 5.Mapping the Sources of Excessive Deficit into Tasks of a Fiscal Council
Causes and manifestations of the deficit

bias
Tasks of the fiscal council
PolicymakersMyopia, re-election concerns, partisanship: overoptimistic revenue forecast, unrealistic spending estimates, efforts to circumvent fiscal rules (creative accounting).Produce unbiased macro-fiscal forecasts or at least assess official forecasts; analysis of short and long-term implication of current policies, costing fiscal measures; monitoring of compliance with fiscal rules, report on government statistics integrity.
Time inconsistency (policies that were agreed to ex ante are not adhered to ex post).Examine fiscal outcomes in light of government commitments; monitor compliance with fiscal rule.
Imperfect information: underestimation of risks and costs, overoptimistic views on growth, misperception of the government’s budget constraints (notably in cases of abundant commodity revenues), lack of timely data.Analysis of complex issues such as fiscal sustainability, intergenerational equity and fiscal risks analysis; assessments of long term trends, and possibly recommendations on appropriate of fiscal policy,
Asymmetric information (lack of transparency); insufficient background analysis and information received by the legislative power (weakened accountability)Report on a regular basis to Parliament and provide response to questions; contribute to legislative debate on fiscal maters
VotersImperfect information: misperception of the government’s budget constraintProvide unbiased assessment of medium and long-term sustainability; raise public awareness on fiscal issues.
Neglect for future generations and impatienceImpact analysis of unsustainable policy paths and costs of adjusting to the intertemporal budget constraints.
Source: IMF (2013).
Source: IMF (2013).

33. To be effective, a fiscal council should be independent. The usefulness of a fiscal council relies on its ability to communicate an independent assessment of fiscal policy without interference from the government or fear of being disbanded. To increase the likelihood of independence, the council could be established by high-ranking law. The selection of its members should be merit-based and, preferably, would be elected by the legislature. The terms of office of the members should be longer than the political cycle and dismissal procedures should be limited to avoid dismissal for political or partisan reasons. Independence would also be increased if the council had a budget to support its own technical staff.

Box 2.Increasing Interest in Fiscal Councils

Unlike fiscal authorities, fiscal councils work mainly through influence and persuasion in the public debate. Experience of other economies suggests that these councils can influence the conduct of fiscal policy through independent analysis, assessments, forecasts, and possibly, recommendations.

The number of fiscal councils has increased rapidly. From only one in 1960—the Netherlands Bureau for Economic Policy Analysis, also known as the Central Planning Bureau—the number of councils has surged since the 2008-09 crisis. By 2014, there were 38 fiscal councils (fiscal agencies). Although most of established fiscal councils are in advanced economies, particularly in Europe, there is growing interest in emerging markets and developing economies. This increasing interest in fiscal councils is likely to continue, particularly in Europe, where new legal requirements mandate most European Union member states to establish national independent bodies to monitor compliance with fiscal rules and produce or at least assess or validate macroeconomic and budgetary forecasts.

F. Challenges that Affect the Design and Implementation of the Fiscal Framework

34. A comprehensive analysis of public debt sustainability and an assessment of major fiscal risks and contingent liabilities would be important inputs to the design of the fiscal framework. Unfunded liabilities of the defined benefit pension system may eventually crowd out other components of public spending. The exclusively defined benefit pension system started to incur losses in 2015. Actuarial studies indicate that absent parametric reform, the pension system’s reserves will be depleted in about a decade and pension obligations would then impose fiscal pressure of 1-2 percent of GDP.

35. Panama also faces other fiscal risks. For instance, the external debt of some public enterprises is not included in the Non-Financial Public Sector. Other contingent liabilities could arise from the financial sector, natural disasters, and litigation. The SFRL requires that the budget documentation includes a debt sustainability analysis, and an assessment of fiscal risks and contingent liabilities. These requirements are yet to be implemented in practice.

G. Conclusion

36. This paper assesses Panama’s fiscal framework and fiscal rules relative to best practices. After adopting a rules-based fiscal framework in 2009, the structural deficit and net debt of the NFPS have declined. Nonetheless, there are options to better align the framework with best practices, including to reduce unintended procyclicality, increase transparency, and improve accountability. An independent fiscal council could help assess budgetary assumptions, evaluate performance, communicate fiscal objectives and outcomes, and provide analytical inputs to periodically review the design of the rule. Complimentary structural reforms and long-term fiscal risks would also need to be assessed as inputs to the framework to ensure fiscal objectives are achieved.

References

Prepared by Fang Yang (WHD).

The exercise encompasses changing the base year from 1996 to 2007 as well as enhancing the computation methodology. The upward revision to nominal GDP is between 5 to 8 percent, depending on the year.

The net debt was about 36 percent of GDP at end-2015 and is projected to decline to about 32 percent of GDP by 2020.

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