Panama: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Panama
Author:
International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
24 Mar 2023
eISBN:
9798400237942
Language:
English
Keywords:
construction boom; coverage ratio; headline inflation; sea waves JW Marriott Panama; IMF TA; Public sector; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global
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1. The Fund has provided significant support to Panama following the outbreak of the pandemic. Panama benefitted from financial support under the Rapid Financing Instrument (RFI), a two-year PLL arrangement, and a SDR allocation. All in all, the Fund has provided support to Panama for over 61/4 percent of GDP since the beginning of the pandemic.

Abstract

1. The Fund has provided significant support to Panama following the outbreak of the pandemic. Panama benefitted from financial support under the Rapid Financing Instrument (RFI), a two-year PLL arrangement, and a SDR allocation. All in all, the Fund has provided support to Panama for over 61/4 percent of GDP since the beginning of the pandemic.

Background

1. The Fund has provided significant support to Panama following the outbreak of the pandemic. Panama benefitted from financial support under the Rapid Financing Instrument (RFI), a two-year PLL arrangement, and a SDR allocation. All in all, the Fund has provided support to Panama for over 61/4 percent of GDP since the beginning of the pandemic.

IMF Support

article image

Rapid Financing Instrument.

Precautionary and Liquidity Line.

Strong Recovery Post-Pandemic but Large Scarring

2. In the decade-and-half preceding the covid-19 pandemic, an unprecedented construction and investment boom led to rapid growth of GDP, employment, and incomes. The Panama Canal and Tocumen Airport were expanded, there was large scale building of new skyscrapers in Panama City, and one of the largest copper mines in the world was constructed. Economic growth was further supported by the expansion of the services and logistics sectors, which benefited from the widening of the Panama Canal. With a rapid expansion of the capital stock, real GDP grew by 6 percent annually, poverty declined sharply, and income levels rapidly converged with those in advanced countries. In terms of growth accounting, rapid GDP growth was the result of rapid growth of factor inputs, while TFP levels declined.1

uA001fig01

Change in Real Investment in 2020

(Percent)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: IMF, World Economic Outlook.
uA001fig02

Distribution of Average Construction to GDP Ratio, 2015-19

(Number of countries within each range)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: UN Stats.

3. The construction-to-GDP ratio far outpaced that in other countries. The level and the increase were also far higher than in other well-known construction booms (Figure 14).2

Panama’s Large-scale Construction Projects

article image
Sources: Wikipedia and Panamanian press.
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Sources: Haver Analytics, National Authorities and IMF staff calculations.

4. In 2018, the boom had started to slow, and in 2019 the economy grew by 3 percent only. Investment gradually slowed following the completion of major public infrastructure projects, including the Canal expansion and a new terminal in the Tocumen International Airport (Annex VII).

uA001fig04

Real GDP Growth in 2019 and 2020

(In percent)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: IMF, World Economic Outlook.

5. Panama was hit hard by the covid-19 pandemic.3 A long and strict lockdown to mitigate the spread of the pandemic had a severe social4 and economic5 impact. GDP declined by 18 percent and unemployment spiked to 181/2 percent in 2020, from 7 percent in 2019. A forceful government response-which included sharp increases in social and medical spending, and a change of the fiscal responsibility law to allow automatic stabilizers to operate—mitigated the impact of the pandemic on livelihoods.

uA001fig05

Covid-19

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: Johns Hopkins University CSSE Covid-19 Data

6. The recovery has been strong, but GDP levels remain well below pre-crisis projections. Real GDP grew by 15? percent in 2021 and a projected 9 percent in 2022. However, GDP in 2022 is still 13 percent below the level projected before the pandemic and it is likely that GDP will remain well below pre-covid trends. Lower GDP levels are in large part the result of lower potential GDP growth, as a sharp decline in investment has led to a lower growth of the capital stock.

uA001fig06

Real GDP According to Various Vintages

(2017=100)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: IMF, World Economic Outlook and IMF staff calculations.

7. Rising food and energy prices precipitated social unrest. Inflation rose from -2 percent in October 2020 to 5.2 percent in June 2022. Public protests against rising food and fuel prices in early July 2022 (Annex VI) prompted the government to announce a slew of measures, including subsidizing fuel prices at $3.25 per gallon, initially for a period of 3 months, and later extended to January 2023, and an extension of targeted pandemic-era subsidies. Food and fuel subsidies helped reduce headline inflation, which stood at 2.1 percent in December.

8. The Non-Financial Public Sector (NFPS) deficit fell from 101/2 percent of GDP in 2020 to 6.7 percent of GDP in 2021—below the 7-71/2 percent of GDP limit established by the fiscal rule.6 The improvement in the public sector deficit was due to recovering revenues as well as to a decline in spending on transfers as the economy recovered.

uA001fig07

NFPS Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: National authorities and IMF staff calculations.

9. In 2022, the NFPS deficit was further reduced, to 4 percent of GDP. On the revenue side, the deficit reduction was helped by a further rebound in tax revenues, contributions from the Panama Canal Authority (ACP). On the expenditure side, the fiscal cost of the food and fuel subsidies and the extension of the pandemic-era subsidies was offset by cuts in the wage bill and goods and services. Excluding a cash-flow swap operation that shifted 0.5 percentage point in interest payments to later years, the deficit would have been about 41/2 percent of GDP.7

10. The economic recovery and the surge in food and energy prices have led to a deterioration of the current account, but the external position remains strong. In 2020, a sharp drop in imports temporarily narrowed the current account deficit, before it widened again to 31/4 percent of GDP in 2021 and is estimated to have reached 4 percent of GDP in 2022, due to a brisk recovery. Strong capital inflows from foreign direct investment and portfolio inflows continue to support the deficit and reinforce external buffers. The external position is assessed to be broadly consistent with the level implied by fundamentals and desirable policy settings (Annex III).8

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Sources: INEC and IMF staff calculations.

11. Panama's large banking sector9 played an important role in the construction boom, providing construction loans for construction of residential and office buildings and mortgages for residences. The share of mortgage and construction loans in banks' portfolios increased sharply in the last two decades. Currently, they comprise 42.7 percent of total lending.

uA001fig09
Sources: SBP and IMF staff calculations.
Figure 1.
Figure 1.

Panama: Banking Sector

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: IMF Financial Access Survey, SBP and IMF staff calculations.1/ Multibank was reclassified as a foreign-owned general license bank in June 2020 after its acquisition by a foreign bank.

Structure of Financial System, 2021

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Sources: Superintendency of Banks and IMF staff calculations.

Banks with General Banking License conducting business with residents and non-residents, as well as interbank operations.

Banks with International Banking License conducting business only with non-residents and limited interbank operations.

12. The impact of the pandemic on banks' asset quality appears modest. From March 2020 to June 2021 a temporary moratorium on loan service was in place to support borrowers who had difficulty servicing their loans (Annex V). Loans that were modified under the moratorium were not classified as NPL. Since the end of the moratorium, the share of modified loans has declined sharply, but the share of NPLs has increased only modestly.10 From January 2023, all remaining modified loans were reclassified according to the pre-pandemic regulation.

uA001fig10

Modified Loans and Nonperforming Loans

(In percent of total loans)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: SBP.

13. As a result of US monetary tightening, long-term interest rates have increased sharply. Panama's 10-year government bond yield has risen by 244 bps since the beginning of 2022, compared with 190 bps in the US.11 Further increases in US interest rates, or increases in global risk aversion, could put pressures on short-term external debt of nonfinancial corporations, which amounts to 8 percent of GDP.

14. The increase in local bank rates has so far been modest, but this is unlikely to last. The average bank deposit rate increased 40 bps while the lending rate only rose 5 bps (compared to the 400 bps increase in the Fed Funds rate) due to high liquidity in the domestic banking system.12 Traditionally, banking rates adjust with a lag to US rates, and it is unlikely that this time will be different. The increase in bank rates will increase the risk that economic activity slows (section C). Higher interest rates will also add to the debt servicing costs of households and nonfinancial corporations and reduce the interest rate coverage ratio of nonfinancial corporations.

uA001fig11

Local Credit and Deposits

(Percent change, y/y)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Haver and IMF staff calculations.

15. Banks' exposure to the real estate sector is high.13 A fall in house prices or a decline in economic activity could lead to an increase in NPLs on mortgages and a decline in capital. Foreclosure could lead to losses as the average loan-to-value rate of new loans has been high (over 80 percent). Other loan types could be affected as well—borrowers facing difficultly in servicing their mortgage could stop servicing their personal consumption loans.

uA001fig12

Bank Lending By Sectors

(In Percent)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: SBP.

16. Private credit growth is recovering. Private credit grew 6 percent (y/y) in November 2022, up from -3 percent in March 2021. Negative credit growth during the pandemic was likely the result of weak credit demand, as deposit growth was very strong, but deposit growth has since decelerated.

17. Panama remains on the FATF grey list. Since October 2021, the FATF has been expressing significant concern at the conclusion of its plenary meetings that Panama failed to complete its action plan, the deadlines for which expired in January 2021. The FATF strongly urged Panama in October 2022 to swiftly complete its action plan by February 2023 or the FATF will consider calling on its members and urging all jurisdictions to apply enhanced due diligence to business relations and transactions with Panama.

18. Panama continues to step up efforts to build resilience to natural disasters and climate change. The authorities have engaged in a number of initiatives to ramp up their climate policy (see Annex VIII).

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Business Cycle: A Recovery from Unprecedented Shock

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: INEC, SBP and IMF staff calculations.
Figure 2.
Figure 2.

Panama: Panama Canal

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: Haver.

Outlook and Risks

19. GDP growth is likely to slow to 5 percent in 2023 as the rebound from the covid-19 lockdowns fades and the impact of higher US interest rates, higher energy and food prices and slower partner country growth is felt. Over the medium term, output is expected to grow in line with its estimated potential growth rate of 4 percent. This is lower than growth in the pre-covid years, as construction and investment is unlikely to provide the same support to growth going forward. Even if the level of construction remains high, its growth rate is likely to be considerably lower than in the pre-covid years, when construction activity increased by 250 percent between 2009 and 2019. The unemployment rate is projected to fall to 8 percent by end-2023, Staff's current estimate of the NAIRU.

20. Inflation is likely to edge up from 2.1 percent (y/y) at end-2022 to 3.1 percent (y/y) by end-2023, as the subsidies that reduced fuel and food prices in 2022 expire. Inflation is projected to gradually decline to 2 percent (y/y) over the medium term.

21. The current account deficit is projected to narrow from about 4 percent of GDP in 2022 to 21/2 percent of GDP in the medium term, primarily due to a decline in the cost of fuel imports. From a saving-investment perspective, the gradual reduction in the current account deficit over the medium term reflects a strengthening in domestic savings (reflecting lower spending on fuel and a rebound from the dissaving during the pandemic).

22. Private sector credit is likely to grow in line with nominal GDP. NPLs are likely to remain low as modified loans decrease with continued restructuring and more write-offs, and capital adequacy and liquidity ratios are expected to remain well above regulatory requirements.

23. The balance of risks is tilted to the downside, including global uncertainties arising from Russia's war in Ukraine, faster-than-expected US monetary tightening, tighter global financial conditions, higher crude oil prices, new variants of the covid-19 virus, setbacks in fiscal consolidation, disruptions in copper production, and domestic civil unrests that may derail the recovery. Specifically:

  • External risks. A sharper-than-expected slowdown of the global economy, or a further intensification of global tensions, could adversely affect Panama's Canal traffic and Panama's economy more broadly. Increases in global risk aversion could lead to spikes in sovereign bond yields and disruptions to external financing. Renewed increases in global food and energy prices would boost inflation and reduce economic growth.

  • Listings. Insufficient progress in implementing measures with respect to the items in the action plan designed to improve the effectiveness of the AML/CFT regime has prevented the removal of Panama from the FATF grey list. This, along with lack of progress in removing Panama from the EU list of non-cooperative jurisdictions for tax purposes, could potentially affect correspondent banking relationships and key overseas credit channels, threatening financial stability. It could also lead to an exodus of foreigners from the local real estate market.

  • Financial stability risks. A weak economy could lead to higher unemployment and deterioration in real estate prices, resulting in higher defaults on loans. Large deposit withdrawals could affect liquidity in the banking sector, especially banks with lower liquidity buffers. Dislocations in global capital markets could put pressures on the rollover of external nonfinancial corporate and sovereign debts.

  • Security and climate risks. Cyberattacks could bring significant disruptions to digital infrastructure, while more frequent and severe climate-change related natural disasters could adversely affect Canal activity, agriculture, and tourism.

  • Disruptions in copper production. Negotiations between the government and Minera Panama about a new contract are ongoing. There is a risk of disruptions in copper production and exports, which could affect growth, BOP and fiscal revenues (Annex X).

24. The fiscal policy stance in 2023 is expected to be mildly contractionary. The structural primary fiscal deficit is projected to contract by 0.3 percentage points of GDP in 2023. Long-term government bond yields have increased by 260 basis points since end-2021, but deposit and lending rates remain low by historical standards.14

Medium-Term Macroeconomic Outlook

article image
Sources: Ministry of Economy and Finance; INEC; SBP; and IMF staff calculations.

Non-Financial Public Sector (NFPS) as defined in Law 31 of 2011.

NFPS gross debt minus deposits at the National Bank (BNP) and financial assets at Panama's Savings Fund.

Authorities' Views

25. The authorities broadly concurred with staff's views on the outlook and risks. They expected growth of 5 percent in 2023. They recognized global headwinds, but remained positive on medium-term growth prospects, underpinned by infrastructure projects that support investment, full scale copper production, Canal traffic volume and revenue, and a recovery in private investment and tourism.15

26. They recognized that the role of construction in the economy was going to diminish but were optimistic about the contribution to growth in the near term. They pointed to a long list of ongoing and yet to be started multi-year construction projects—including a new metro line, a fourth bridge over the canal, a power plant and transmission line, water treatment facility, and several road constructions and renovations—that will boost construction in the near term.

Main Investment Projects with Disbursements in 2023

(In millions of US$)

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Sources: National authorities and IMF staff calculations.

This table shows the largest investment projects with public disbursements in 2023. Most projects are financed through national banks with some exceptions. Projects 1, 2, 9, and 10 are financed through both national and international banks; projects 3 is financed through partnerships of capital contribution; and project 6 through the IDB. Future projects without disbursements in 2023 include the PPPs for Panamericana Oeste and the Panamericana Este , which together account for a total invest of approximately US$ 602 million, with an initial disbursement of US$ 94.6 million in 2025. The Government plans to invest on some other large projects which are not included in this table as the disbursement plan is not yet concluded. For example, there are plans to construct the fourth bridge over the canal (Cuarto Puente) , the fourth power transmission line, and the Canal Tunnel, with a total investment of US$ 1.3 billion, US$ 696 million, and US$ 300 million, respectively.

Policies

Policies should focus on boosting resilience to shocks and sustaining the rapid convergence with advanced economies. To boost resilience, fiscal buffers should be rebuilt, financial integrity strengthened, and financial sector policies further enhanced. To sustain convergence now that the construction boom may be over, improving human capital and governance is key.

A. Rebuilding Fiscal Buffers

27. The authorities' 2023 NFPS deficit target of 3 percent of GDP (the ceiling set by the SRFL) is appropriate. The further reduction in the deficit will enable a gradual reduction in the public debt to GDP ratio after the sharp increase during the pandemic without putting an undue burden on still strong economic activity. Adhering to the SRFL is also important for fiscal credibility.

2023 Selected Fiscal Measures

(In percent of GDP)

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Source: IMF staff calculations.

28. Staff expects authorities to meet their 2023 deficit target. The reduction in the deficit will be underpinned by the expiration of large covid-19 and cost-of-living subsidies, the elimination of the ITBMS (VAT) exemption on digital platform purchases, and the adoption of several tax administration measures. The Internal Revenue (DGI) and Customs Administration are undertaking significant modernization reforms, including electronic invoicing to prevent VAT under-reporting, greater scrutiny on large corporations by the new Large Taxpayers Unit (LTU), and new, state-of-the-art, scanners at customs checkpoints.16 Part of the resulting fiscal space will be used for an increase in capital expenditure (see chart). Education spending will be increased to meet legally-mandated targets.17

29. The government's plans to further reduce the deficit to 2 percent in 2024 and 11/2 percent of GDP in 2025 and beyond in line with the SFRL are appropriate, as they would underpin a gradual decline in the public debt-to-GDP ratio over the medium term.

30. In staff's baseline outlook, which assumes no new tax initiatives beyond 2023, the deficit target would be met by a reduction in the expenditure-to-GDP ratio.18 This could partly be achieved by returning wages and public consumption to pre-covid levels, but would likely also require a reduction of the public investment to GDP ratio (Table 2).19

uA001fig15

Public Capital Expenditures

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: National authorities and IMF staff calculations.

31. To sustainably reduce the fiscal deficit while creating room for education, social spending, and investment, staff recommend increasing tax revenue. Panama's central government tax-to-GDP ratio is low (in 2022, Panama's central government tax revenue-to-GDP ratio is only 7.8 percent) and was declining even before the pandemic. Tax revenues are low because tax rates are low (especially for the ITBMS, reflecting Panama's investment-friendly business model), many exemptions exist, tax expenditures are high and tax collection efficiency is weak (see SIP 'Panama: Toward a Modern Tax System'). Low tax revenues are partly compensated by non-tax revenues (mainly contributions from the Panama Canal Authority) but total general government revenue is low as well.

32. As the government prefers not to raise the main tax rates, improving tax and customs collection efficiency and broadening the tax base will be key. Broadening the tax base could occur by reducing exemptions, deductions, and tax expenditures. Many of these exemptions are regressive—they mainly benefit higher income levels. More specifically, staff suggests that the government (i) reviews ITBMS tax exemptions and streamline the process for refunds; (ii) reviews exemptions and deductions from the PIT base and (iii) reviews tax incentives for CIT. As regards to raising tax rates, the government could consider raising cigarette and fuel excises to bring them in line with the externalities they cause. Adopting a minimum corporate income tax for companies that pay taxes in the countries where they are headquartered (in response to the introduction of an international minimum tax) could further raise revenues.20

33. In addition, the social security administration (CSS) needs to address a deficit in the defined benefit component of the social security system.21 There are two pension systems within the social security system: (i) a defined benefit plan, which was closed for new participants in 2008; and (ii) a newer, mixed system (largely defined contributions). The defined benefit plan is running deficits, currently financed through the pension fund's reserves and an escrow fund that the government established in 2004, but these reserves will run out in late 2024 or early 2025. The government has not yet committed to a reform plan.22 It is waiting for the “social dialogue” with employers and unions scheduled in early 2023.

34. Strengthening medium-term fiscal planning would further help achieve the fiscal targets. So far, the government adheres to a modified fiscal rule that focuses on the deficit of the non-financial public sector. Adoption of a broader medium-term fiscal framework that sets out the levels of revenues and expenditures consistent with achieving this target would enhance the credibility of this framework. Parliamentary approval of the General Budgetary Administration Law (which is expected in the first half of 2023) will further strengthen the fiscal strategy.23

Authorities' Views

35. The authorities noted that fiscal policy had played an important role in supporting the economy during the pandemic. This had been particularly important given that Panama did not have its own monetary policy. They were confident they would meet the fiscal target in both 2022 and 2023 and were committed to reduce the fiscal deficits in line with the ceilings set in the SFRL in later years. At the same time, they planned to support the economy through extensive infrastructure and investment projects.

36. The authorities agreed with the need to boost revenues. While they believed that a low tax burden greatly benefits Panama's business environment, they were open to reductions in tax expenditures that could reduce economic inequality, and to tax measures that addressed profit-base erosion on the part of multinational corporations. They were also committed to implement several measures to reduce non-compliance; including a track-and-trace system to reduce illegal commerce and smuggling of cigarettes and alcohol beverages; tighten the control of withholding systems; and improve the cross-checking of tax information. They had submitted a bill to impose VAT on digital services provided by non-resident platforms and taxpayers.

B. Strengthening Financial Integrity

37. Panama has been on the FATF grey list since June 2019. In 2019, the FATF designated Panama as a “jurisdiction with strategic deficiencies” due to low levels of effectiveness identified in several areas of its AML/CFT regime. In response, the authorities agreed on an action plan with the FATF to address: (i) national and sectoral ML/TF risks; (ii) supervision and sanctions against AML/CFT violations; (iii) verification and update of ultimate beneficial ownership (UBO) information of legal persons and arrangements; and (iv) investigation and prosecution involving foreign tax crimes. The original deadlines for implementing all the necessary reforms were September 2020 for items (i) to (iii) and January 2021 for item (iv).

38. The authorities have made important progress in addressing outstanding issues of the FATF action plan. By October 2022, the authorities had, “largely addressed” 12 out of 15 action items on the FATF action plan, while “partly addressing” the remaining 3. Recent progress to address the remaining items is discussed in Annex IX.

39. Addressing the remaining issues is critical to avoid adverse action by the FATF and preserve Panama's role as a regional financial center. At the conclusion of the four most recent FATF plenaries, the FATF expressed discontent with the pace of progress towards completing the action items on Panama's FATF action plan, threatening adverse action. After the October 2022 plenary, the FATF urged Panama to swiftly demonstrate significant progress in completing its action plan by February 2023 or it would consider next steps, which could include calling on its members and urging all jurisdictions to apply enhanced due diligence to business relations and transactions with Panama.

40. Fintech companies should be subject to AML/CFT regulation and supervision. In December 2022, there were 10 Fintech companies operating within the financial sector with authorizations granted by the Ministry of Industry and Commerce (MICI), focusing largely on providing lending products and payment services to households and non-financial corporations. However, these Fintechs are not currently subject to AML/CFT preventive measures, either at the early stages of the licensing process or to supervision by the MICI or SBP (currently the designated AML/CFT supervisory authority for “Financieras”, as per Law 23).

Authorities' Views

41. The authorities believed that the remaining items on the FATF action plan were likely to be considered “largely addressed” in 2023—if not at the FATF meeting in February then at the latest at the next meeting in June. They remain committed to enhance the effectiveness of Panama's AML/CFT regime beyond the immediate goal of exiting the FATF grey list, which is evident in the new resources and staff assigned to the appropriate government agencies.

42. The authorities agreed that virtual asset service providers (VASP) should be subject to adequate regulation and supervision to ensure effective implementation of the obligations imposed under Law 23 of 2015 (AML/CFT Law). They noted that the AML/CFT Law needs to be amended to designate: (i) VASPs as reporting entities subject to all preventive measures obligations; and (ii) a competent supervisory authority with responsibility over these financial institutions.

C. Strengthening Financial Sector Resilience

43. In the absence of a lender of last resort and deposit insurance, ensuring that banks are well capitalized and liquid is essential to preserve Panama's role as a regional financial center. Aggregate capital and liquidity buffers in Panama's large banking sector are currently well above regulatory minima.24 The capital adequacy ratio was 15 percent at end-September (above the minimum requirement of 8 percent), while liquidity buffers at end-2022 covered 57 percent of short-term deposits (almost double the regulatory requirement of 30 percent).

44. The SBP conducts regular stress tests to ensure that banks have adequate capital and provisions. The latest stress test shows that—in an adverse scenario with a real GDP growth of -2 percent, unemployment rate of 18 percent, and after accounting for all modified loans—all banks remain solvent although the capital adequacy ratios of two small banks could fall below the Basel III minimum of 8 percent.

Distribution of Banks According to Capital Adequacy 1/

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Source: SBP.

Based on 34 banks accounting for 90 percent of total assets in the banking system.

45. The SBP continues to step up its prudential supervision. Its post-pandemic supervision focuses on three main areas to ensure that banks: (i) reclassify modified loans and make loan-loss provisions correctly in line with the pre-pandemic classification rule; (ii) have sound business strategies to address asset quality and liquidity risks; and (iii) incorporate and properly manage climate risks as part of their operational risk.

46. Actions that would further strengthen the resilience of the banking sector include:

  • To mitigate asset quality and liquidity risks:.

    • A risk-focused approach to examine loan portfolios—guided by solvency stress tests— should continue to ascertain banks' credit risk, provisioning and capital buffers.

    • Instituting liquidity stress test—with the support of IMF TA—will help determine whether banks have sufficient funding sources to withstand unexpected market disruptions, particularly systemically important ones.

    • Expanding the macroprudential policy toolkit25 with additional borrower-based measures for households—such as caps on the loan-to-value and debt-service-to-income ratios—and mapping them to vulnerabilities will enhance monitoring and enable timely activation of macroprudential policies to preempt and mitigate asset quality risks. Completing the ongoing initiatives to enhance data collection would enable the implementation of these borrower-based indicators.

  • To enhance resilience: Implementing the Basel III capital conservation buffer and surcharge for systemically important banks will further increase loss-absorbing capacity.

  • Crisis preparedness. All banks should prepare recovery plans, with the SBP developing resolution plans for systemic banks. In the medium term, a deposit insurance scheme should be developed to protect depositors, and an official lender of last resort function put in place to support sound banks experiencing temporary liquidity shortfalls. Until these reforms have been implemented, the emergency liquidity window of the FES26 should be kept in place.

47. Initiatives to strengthen banks' management of climate risks are underway. A new Rule 11-2022 has been implemented requiring banks to incorporate climate risks in the measurement of operational risk.

48. Safeguards assessment. The BNP has implemented all the recommendations from the first-time safeguards assessment completed in September 2020. Separately, the legal framework for operationalizing the FES has been approved, foreign exchange investment practices were enhanced, and new control procedures to mitigate risks of misreporting of monetary data to the Fund have been established, building on a review by the internal audit function.

Authorities' Views

49. The authorities highlighted that the banking system remains well capitalized and liquid and were committed to tight regulatory oversight. They expressed concerns that pockets of vulnerabilities remain, as global uncertainties and rising interest rates could result in tighter funding conditions, particular for smaller banks with limited deposit base. They emphasized that safety nets—especially from the liquidity facility in the FES—were important and that intrusive supervision and intensive monitoring of banks would continue to preempt risks, and recalibrate capital and provisioning requirements. They agreed that, in the longer run, deposit insurance could be another important safety net although cost issues would first need to be addressed.

50. They remained committed to implement additional prudential measures, including macroprudential tools, to safeguard financial stability. Initiatives are underway to address the remaining data gaps in households and corporate sector to supporting the establishment of borrower-based indicators. Additionally, they will continue to refine banks' management of climate risk based on the outcomes of surveys.

D. Sustaining Convergence

51. The future contribution of construction to growth is uncertain. Construction activity increased by 250 percent between 2009 and 2019, and at the peak of the construction boom in 2013 contributed 3.0 percentage point to annual growth. If—as staff projects—construction levels will stabilize, the contribution to GDP growth will drop to zero.

52. To sustain rapid growth, other productive sectors will need to take over, including the export sector, which—with the notable exception of mining—has seen little expansion in the last two decades.

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Sources: Haver and IMF staff calculations.

53. To sustain convergence, improving human capital and governance is key. According to Bakker et al. (2020), there is conditional convergence—countries tend to converge to levels consistent with their human capital and governance indicators. Countries with high human capital and governance tend to be rich, and countries with low indicators stay poor (see chart). For its per capita income level, Panama scores poorly on governance and human capital relative to peers.

  • World Bank human capital index scores are low not just compared with high-income countries, but also by regional standards.27 Human capital has likely deteriorated further during the pandemic. Schools were closed for more than 15 months, with varying access to and quality of digital learning. A World Bank survey suggested a high disengagement rate among remote learners, particularly among poor and rural households, widening educational gaps for the economically disadvantaged populations.

  • Governance indicators are well below high income countries to which Panama hopes to converge. According to the 2021 Worldwide Governance Indicators28 which report on six dimensions of governance, Panama performs similar to Latin America and Caribbean, but worse than Western Europe, North America, and CESEE.

uA001fig17

Human Capital and Governance Indicators1/

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: World Bank, Worldwide Governance Indicators, 2022 Update, D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank), Penn World Tables 10.0, and IMF staff calculations.1/ The values for the governance indicator are the average of the estimates for the 6 aggregate indicators of governance from the Worldwide Governance Indicators. CESEE refers to Central, Eastern, and Southeastern Europe.

54. Better education and an alignment of academic curricula with job market needs would boost human capital. A knowledge exchange with industry leaders would help the education system prepare students for high skilled jobs. Vocational and on-the job training (such as Aprender Haciendo for youth) as well as supporting infrastructure for commuting and childcare would help move labor into productive sectors.

55. Tailored support to women and indigenous groups seeking to enter (or re-enter) the labor force would further help. Other gender-focused reform priorities include integrating women in the workforce (through training) and formalizing their entrepreneurial activities (through workshops and outreach).

56. To improve governance, Panama needs to enhance its public sector efficiency and transparency. Low corruption perception scores point to a lack of trust in institutional functions, while low judicial independence and weak insolvency frameworks and property rights dampen the business climate. Additionally, the authorities need to strengthen contract enforcement, enhance public communication and outreach (including through reliable data provision and timely information sharing), and enhance the degree of digitalization of government services. Areas of governance where Panama performs relatively well include regulatory quality, voice and accountability, and political stability and absence of violence/terrorism.

57. Other reforms include updating labor laws (overly stringent firing practices and restrictions on foreign workers coupled with a lack of skilled local labor thwart foreign investment), raising innovation capacity by boosting incentives for investment in science and research, and improving critical infrastructure (expanding road connectivity, providing reliable utilities, and enhancing the energy matrix and water management).

Authorities' Views

58. The authorities agree with the need to boost human capital and productivity. They noted that the increase in education spending aims at boosting academic outcomes, focusing in particular on primary education, digital literacy, and English proficiency. They are also cognizant of the need to boost Panama's productive capacity by digitizing public service delivery, enhancing the skillset and digital literacy of the workforce through training programs, and reducing labor market informality. They are working on simplifying and automating government procedures as well as improving citizen engagement to reduce corruption perceptions.

E. Improving Statistics

59. Data is broadly adequate for surveillance albeit with some shortcomings, particularly on timeliness (see Informational Annex). For example, 2022Q2 BOP data was only published in January 2023.

uA001fig18

Governance Indicators1/

(Higher is better)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: The Worldwide Governance Indicators, 2022 Update. D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank).1/ Average of the estimates for the 6 aggregate indicators of governance.

60. Staff turnover and the ongoing census and GDP rebasing projects have caused broad delays in the release of macroeconomic statistics including labor and external sector data, and impacted the timely publication of the IMAE.

61. More timely publication of the IMAE is a key remaining issue before Panama subscribes to the SDSS. Panama can currently only publish the IMAE with a timeliness of 55 days, while the SDDS requires 6 weeks. Compliance with the current eGDDS targets set by the authorities for timeliness and frequency is also required.

62. Several ongoing projects will improve statistics.

  • Seasonal adjustment methodology for the monthly IMAE indicator—supported by IMF TA—will support high-frequency monitoring and reflect the current economic structure and growth engines.

  • The National Statistical Plan (NSP) 2021-25 will foster statistical development and help advance toward SDDS subscription.

Authorities' Views

63. The authorities remain committed to subscribe to the SDDS in the near-term. They are pressing ahead with the implementation of the NSP while re-prioritizing amid limited resources. The population census as well as the GDP and CPI rebasing exercises are key priorities for 2023.

Figure 3.
Figure 3.

Panama: Real GDP and Production Factors

(In constant US dollars)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: Penn World Tables 10.

Staff Appraisal

64. Post-pandemic policies should focus on rebuilding buffers and ensuring the convergence of Panamanian income levels with those in advanced countries continues.

65. The government's plans to further reduce the overall NPFS deficit to 3 percent in 2023 and 11/2 percent of GDP in 2025 are appropriate. To sustainably reduce the fiscal deficit while preserving social spending and creating room for more education spending, tax revenue will need to increase. Improving tax and customs collection efficiency and broadening the tax base—by reducing exemptions, deductions, and tax expenditures—will be key.

66. Exiting the FATF grey list remains a priority. The authorities need to expediently address the remaining deficiencies in Panama's AML/ CFT regulatory framework identified by the FATF.

67. With no lender of last resort and deposit insurance, it is imperative that the banking system remains well-capitalized and liquid. Current capital-adequacy and liquidity indicators in the banking system are well above regulatory minima, and continued intensive supervision and monitoring and expanding the macroprudential policy toolkit will help mitigate future asset quality and liquidity risks. Fintech companies should be subject to AML/CFT regulation and supervision. The ongoing FSAP will further inform the performance and vulnerabilities in Panama's financial system.

68. Going forward, it is likely that construction will not provide the same boost to growth as it has in the past two decades. For convergence to continue, other sectors will need to take over, and bringing human capital and governance standards in line with those in advanced countries would help.

69. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Figure 4.
Figure 4.

Panama: Real Sector Developments

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: INEC and IMF staff calculations.1/ 2022 data is from the April 2022 labor market survey.
Figure 5.
Figure 5.

Panama: Fiscal Developments

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: National Authorities, World Economic Outlook and IMF staff calculations.1/ Non-Financial Public Sector.2/ Data refer to the Central Government.3/ Countries in the chart are CAPDR (Guatemala, Honduras, Nicaragua, El Salvador, Costa Rica, Panama and Dominican Republic) and Brazil, Chile, Colombia, Mexico, and Peru.
Figure 6.
Figure 6.

Panama: External Sector Developments

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: INEC and IMF staff calculations.1/ Panama's NEER and REER exclude Venezuela.
Figure 7.
Figure 7.

Panama: Banking Sector Soundness

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: SBP and IMF staff calculations.
Figure 8.
Figure 8.

Panama: Balance of Payments

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: Haver.
Figure 9.
Figure 9.

Panama: Central Government Finances

(Percent of GDP, four quarter totals)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Haver and IMF staff calculations.
Figure 10.
Figure 10.

Panama: Central Government Finances

(US$ millions, four quarter totals)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Haver and IMF staff calculations.
Figure 11.
Figure 11.

Panama: General Government Finances

(US$ millions, four quarter totals)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Haver and IMF staff calculations.
Figure 12.
Figure 12.

Panama: Balance of Payments

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: INEC, Haver and IMF staff calculations.
Figure 13.
Figure 13.

Panama: Investment by Activities

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: CEIC database, INEC and IMF staff calculations.
Figure 14.
Figure 14.

Panama: Construction – Comparison between Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: UN database of national accounts and IMF staff calculations.
Figure 15.
Figure 15.

Panama: Labor Markets

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: INEC and IMF staff calculations.
Table 1.

Panama: Selected Economic and Social Indicators 2018–28

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Sources: Comptroller General; Superintendency of Banks; and IMF staff calculations.

Includes Panama Canal Authority (ACP). Includes Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18. These estimates are preliminary.

Non-Financial Public Sector according to the definition in Law 31 of 2011.

Includes debt of public enterprises outside the national definition of NFPS (ENA, ETESA, and AITSA) and non-consolidated agencies.

Table 2.

Panama: Summary Operations of the Non-Financial Public Sector, 2018–281

(In percent of GDP)

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Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.

Official presentation excludes the operations of the ACP as it is not part of the NFPS.

Includes the balances of the nonconsolidated public sector and revenue of the decentralized agencies. Also includes in 2021 a debt issue premium by US$241 million.

In 2022, includes one-off land sale by the central government to the ACP.

Different from Table 3 as it excludes the transfers to other agencies.

Staff adjustment to account for the accrual of previously unrecorded expenditure for 2014-19. These estimates are preliminary.

Excluding the impact of the 2022 cash-flow swap operation, the deficit would be 4.5 percent of GDP in 2022, 1.8 in 2024, 1.3 in 2025, and 1.4 in 2026.

Includes staff adjustment for net financing through the change in obligations related to unrecorded expenditure for 2015-2019. For 2019, also accounts for deposits accumulated in pre-financing operations.

Primary balance adjusted for the output gap.

Table 3.

Panama: Summary Operations of the Central Government, 2018–28

(In percent of GDP)

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Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.

Includes public service fees.

Includes in 2021 a debt premium by US$241 million as per GFSM 1986, the reporting system followed by the authorities.

In 2022, includes one-off land sale by the central government to the ACP.

Staff adjustment to account for the accrual of previously unrecorded expenditure for 2014-19. These estimates are preliminary.

Current revenues and grants less current expenditure.

Excluding the impact of the 2022 cash-flow swap operation, the deficit would be 4.6 percent of GDP in 2022, 2.3 in 2024, 1.7 in 2025, and 1.8 in 2026.

Includes staff adjustment for net financing through the change in obligations related to unrecorded expenditure for 2015-2019. For 2019, also accounts for deposits accumulated in pre-financing operations.

Table 4.

Panama: Public Debt, 2018–28

(In percent of GDP)

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Source: Ministry of Finance and IMF staff calculations.

Includes staff adjustment for accumulated obligations related to unrecorded expenditure in 2014-2019. These estimates are preliminary.

Deposits at the National Bank (BNP).

For 2020, it includes a withdrawal of US$ 0.1 billion for deficit financing.

Central Government gross debt minus assets of the Sovereign Wealth Fund (FAP).

Table 5.

Panama: Summary Accounts of the Banking System, 2018–281

(In millions of U.S. dollars, unless otherwise stated)

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Sources: Superintendency of Banks; National Bank of Panama; Savings Bank; and IMF staff calculations.

M2 comprises bank deposits; estimates of U.S. currency in circulation are not available.

Table 6.

Panama: Financial Soundness Indicators, 2015–2022-Q3

(In percent, end-of-period)

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Source: IMF Financial Soundness Indicators.

The statutory Legal Liquidity Index (LLI) used by the authorities defines a 30 percent minimum requirement on liquid assets (including cash and certain debt securities) as a share of qualifying deposit with a time horizon of 186 days whereas these two indicators (“liquid assets to total assets” and “liquid assets to short-term liabilities”) are standard indicators based on the IMF’s Financial Soundness Indicators Guide, which defines short-term liabilities as liabilities falling due within three months or less plus the net market value of the financial derivatives position.

Table 7.

Panama: Summary Balance of Payments, 2018–28

(In percent of GDP, unless otherwise stated)

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Sources: INEC; and IMF staff calculations.
Table 8.

Panama: External Vulnerability Indicators, 2018–24

(In percent, unless otherwise specified)

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Sources: Ministry of Economy and Finance; and IMF staff calculations.

One-year average for the banking system, comprises general license banks, excluding offshore banks.

Includes transactions conducted in the Colón Free Zone.

Corresponds to gross foreign assets of the National Bank of Panama (a publicly-owned commercial bank).

M2 consists of resident bank deposits only; estimates of U.S. currency in circulation are not available.

Excludes off-shore banks' external liabilities. Short-term public external debt includes next year amortization.

Negative sign indicates depreciation.

Annex I. Implementation of Past IMF Policy Advice

The authorities' macroeconomic and financial policies remained broadly in line with past Fund advice in 2021, underpinned by strong economic recovery as the covid-19 shock receded. In particular, the authorities strengthened the credibility of their fiscal framework by improving tax transparency standards in line with best international practices. They continue making progress on the FATF action plan. However, more needs to be done to address the outstanding action items in the FATF action plan to strengthen the effectiveness of the AML/CFT regime and exit the FATF grey list.

1. Fiscal Policy. The Social and Fiscal Responsibility Law (SFRL)—streamlined in October 2018 and further modified in response to the covid-19 pandemic— continues to be the anchor, in line with IMF's recommendations. Recent initiatives include the authorities' efforts to bring tax transparency standards in line with best international practices. For example, the new tax transparency law (No. 254 of November 11, 2021) imposes additional requirements on legal entities regarding the provision of accounting records. In addition, Panama increased the tax rate on its Multinational Enterprise Headquarters regime (from zero to 5 percent), in line with IMF TA recommendations.

2. Financial Integrity and Tax Transparency. Since Panama was grey listed by the FATF, Fund advice provided on AML/CFT has been redirected at assisting the authorities—in particular the CNBC, the MEF, and the SSNF—in addressing selected outstanding action items on its action plan. IMF technical assistance touched upon many areas including (i) risk assessments; (ii) supervision of DNFBPs; and (iii) transparency of legal persons and legal arrangements. Accordingly, and in line with Fund advice, the authorities have made progress in these and other areas of their AML/CFT regime identified as deficient by the FATF.

3. Financial Sector Soundness and Reforms. The moratorium on loan service and grace period for the restructuring of these loans officially ended on June 30, 2021, and September 30, 2021, respectively. The authorities continued to undertake stress tests to guide the recalibration of provisions for modified loans and increase the level of provisioning on banks that are highly exposed and vulnerable. At the same time, prudential supervision on banks has been intensified. These are in line with Staff advice. The Basel III capital adequacy framework was implemented in 2018, and the Liquidity Coverage Ratio (LCR) was gradually phased-in.1 The latest Financial Stability Report 2021 included an analysis on macroprudential issues, covering discussions on household and corporate vulnerabilities, in line with the recommendations of the Technical Assistance on Macroprudential Policy for Systemic Risks.

4. Data Adequacy. The authorities' National Statistical Plan 2021-25 is aligned with Fund advice provided in the ROSC and recent advances in the dissemination of fiscal and internal reserves and foreign liquidate data have addressed most of the pending requirements for Panama to subscribe to the Special Data Dissemination Service. Ongoing efforts to complete a GDP rebasing exercise will help reflect in national accounts the current economic structure and growth engines.

5. Structural Reforms. While phasing out covid-related support, the authorities have remained cognizant of the need to maintain targeted social transfer programs and have continued to sustain the consumption needs of the vulnerable, in line with Fund recommendations, with the use of a registry of beneficiaries. Other areas of public policy (education, healthcare, gender equity and social inclusion) have not seen much progress, delayed by the pandemic. Infrastructure development has resumed somewhat, with the construction of the third Panama City metro line currently underway.

Annex II. Prospects and Risk Assessment Matrix1

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Annex III. External Sector Assessment

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Figure AIII.1.
Figure AIII.1.

Panama: External Debt Sustainability—Bound Tests 1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
Table AIII.1.

Panama: External Debt Sustainability Framework, 2017–28

(In percent of GDP, unless otherwise indicated)

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1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt. 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). 3/ For projection, line includes the impact of price and exchange rate changes. 4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Annex IV. Debt Sustainability Analysis

Figure AIV.1.
Figure AIV.1.

Panama: Risk of Sovereign Stress

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: Fund staff. Note: The risk of sovereign stress is a broader concept than debt sustainabllity. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). In contrast, a sovereign can face stress without its debt necessarily being unsustainable, and there can be various measures-that do not involve a debt restructuring-to remedy such a situation, such as fiscal adjustment and new financing.1/ The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement. In surveillance-only cases or in cases with precautionary IMF arrangements, the near-term assessment is not published.2/ A debt sus tainability assessment is optional for surveill ance-only cases and mandatory in cases where there is a Fund arrangement. The mechanical signal of the debt sustainability assessment is deleted before publication. In surveillance-only cases or cases with IMF arrangements with normal access, the qualifier indicating probability of sustainable debt (“with high probability” or “but not with high probability”) is deleted before publication.
Figure AIV.2.
Figure AIV.2.

Panama: Debt Coverage and Disclosures

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.4/ Includes accrual recording, commitment basis, due for payment, etc.5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity.7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values.Commentary: in Panama, the non-financial public sector is defined by Law 31 of 2011 and primarily includes the central government, the social security agency (CSS), public enterprises, and consolidated government agencies. It excludes public enterprises such as ENA, ETESA, and AITSA, non-consolidated agencies, and the Panama Canal Authority.
Figure AIV.3.
Figure AIV.3.

Panama: Public Debt Structure Indicators

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Figure AIV.4.
Figure AIV.4.

Panama: Baseline Scenario

(In percent of GDP unless indicated otherwise)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Figure AIV.5.
Figure AIV.5.

Panama: Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: IMF Staff.1/ Projections made in the October and April WEO vintage.2/ Data cover annual obervations from 1990 to 2019 for MAC advanced and emerging economies. Percent of sample on vertical axis.3/ Starting point reflects the team's assessment of the initial overvaluation from EBA (or EBA-Lite).
Figure AIV.6.
Figure AIV.6.

Panama: Medium-Term Risk Analysis

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Annex V. Management of the Banking Sector During the Covid-19 Pandemic

1. Panama was severely affected by the covid-19 pandemic. To contain the spread of the virus, the authorities implemented stringent containment measures, which included—among others—curfews, mandatory quarantine, sanitary fence around affected areas, school closure, and suspension of commercial flights and construction projects except health-related ones. Along with a global recession, these containment measures had significantly reduced mobility and commercial activity, precipitating a sharp contraction of the economy (by 17.9 percent in 2020) and an increase in unemployment rate to 18.5 percent in September 2020 (from 7.1 percent in 2019). As a result, many borrowers who were affected by the pandemic had difficulty servicing their loans, putting pressures on bank's asset quality. The prospects of a significant increase in NPLs sparked concerns as it could jeopardize financial stability and further exacerbate the downturn in the domestic economy. This prompted the authorities to take temporary remedial actions to support affected borrowers and preserve the stability of banks.

2. To support borrowers who were affected by the pandemic, the authorities implemented a temporary moratorium on loan service. As borrowers affected by the pandemic were unable to service their loans due to loss of income, the government and the banking community agreed on a temporary moratorium on loan service, from March until the end of 2020, in the form of voluntary loan restructuring, grace periods, and in some cases interest rate reduction (Box A5.1). Under this temporary forbearance, loans that were modified under the moratorium (modified loans) would not be classified as nonperforming loans (NPL). As the recession deepened, the share of modified loans increased to a high of 47.6 percent in July 2020 (local portfolio), from 38.8 percent of total loans in April 2020. The moratorium was extended until June 30, 2021, following an announcement by President Cortizo in October 2020. The ratio of NPL to total loans stood at 2.0 percent in the fourth quarter of 2020 (1.7 percent in the first quarter). Since then, the NPL ratio rose to 2.7 percent in the second quarter of 2022, reflecting the recognition of credit losses following the end of the moratorium.

uA001fig19

Modified to Total Loans Ratio and New COVID-19 Cases

(In percent and number of cases, respectively)

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Johns Hopkins University CSSE COVID-19 Data, and SBP.1/ Based on the local portfolio.

3. To safeguard financial stability, the authorities released banks' dynamic provisions and implemented an ad hoc provisioning requirement. The SBP allowed the use of dynamic provisions made by banks during periods of economic prosperity amounting to US$1.3 billion (about 2 percent of GDP) to absorb write-offs, where needed. Only five banks used such provisions. At the same time, an ad hoc regulatory requirement was implemented, requiring banks to create a provision equivalent to 3 percent of the gross modified loan portfolio. This helped to increase total loan-loss provision to 148 percent of NPL in 2020 (from 102 percent of NPL in 2019). Throughout the pandemic, the total regulatory capital adequacy ratio in the banking sector remained high, averaging 15.7 percent in 2020, partly supported by these ad hoc measures along with the moratorium on loan service.

4. As more sectors of the economy started to reopen, economic activities began to recover, and the share of modified loans started to decline. After peaking at 47.6 percent of total loans in July 2020, the share of modified loans gradually delined to 42.2 percent at the end of 2020. The government's vaccination campaign, which started in January 2021, helped to accelerate the recovery further. By November 2021, 70 percent of Panama's population had been vaccinated with at least one dose of the covid-19 vaccine. As Panama's economy continued to rebound strongly in 2021, loan service improved significantly, anchoring a further reduction in modified loans to 16.8 percent of total loans at the end of 2021. Modified loans that are serviced for six consecutive months were reclassified as normal loans.

5. The authorities' approach in managing the banking sector during the covid-19 crisis has been successful in safeguarding financial stability. The moratorium formally ended in June 2021, and a three-month window period (July 1 to September 30, 2021) was designated for banks and the remaining affected borrowers to negotiate and restructure their modified loans. As the economic recovery gains momentum, the share of modified loans was reduced further to 11.9 percent of total loans at the end of the first quarter of 2022. Banks remain well capitalized and liquid. At end-2021, total regulatory capital adequacy ratio stood at 15.9 percent (compared to 153/4 percent as of end-2020), against a minimum requirement of 8 percent. Liquidity remained high as short-term assets covered 60 percent of short-term deposits as of end-December 2021 (631/2 at the end of 2020), double the regulatory minimum of 30 percent. Moreover, no banks had used the liquidity facility under the FES. To ensure adequate recognition of credit risks within the modified portfolio, Rule 3 2021 was established by the SBP to guide the classification of these loans based on the loan service by affected borrowers and progress of the restructuring (Table A5.1 provides further details).

Table AV.1.

Categorization of Modified Loans (Rule 3, 2021)

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Source: SBP.

6. As of January 2023, the categorization of modified loans will migrate back to its original pre-pandemic regulation. In November 2022, the SBP adopted a resolution (Rule 12-2022) to re-classify modified loans based on the original regulation before the pandemic (Rule 4-2013), with effect from January 2023, with the following parameters (Table A5.2):

Table AV.2.

Reclassification of Modified Loans According to Rule No. 4-2013

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Source: SBP.

Moratorium on Loans During the Covid-19 Pandemic

Temporary moratorium on loan service. The Panamanian Government enacted Law 156 on June 30, 2020, as a relief measure for borrowers who are economically affected by the covid-19 pandemic. The Law—gazetted on July 1, 2020 and was made effective retroactively as of March 1, 2020—established a moratorium period until December 31, 2020, for certain credits granted by banks, finance companies, and cooperatives.

  • “Affected borrowers” are those whose employment contract has been suspended or terminated, independent workers, and business entities whose activity has been affected by the containment measures established by the government following the declaration of the national state of emergency. The moratorium includes residential mortgages, personal loans, car loans, credit cards, loans to small and medium-sized companies, commercial loans, consumer loans, and loans to the transportation and agricultural sectors.

  • During the moratorium, banks, finance companies and cooperatives were forbidden to increase interest rates or collect surcharges or any other interest for loans included in the moratorium. In addition, the credit history of affected borrowers will not be affected throughout the national state of emergency, and up to 60 days after its conclusion.

Post moratorium. The Law also establishes that once the period of the moratorium expires, the creditors and affected borrowers will negotiate a refinancing or pro-rating of the loan, based on mutual agreement, without charging any fees for late payment or any other administrative expense, and the credit references of the affected borrowers will remain unaffected.

Annex VI. Social Issues and Recent Protests

Despite its rapid growth in the recent years and relatively high level of economic development and income per capita, Panama faced a multitude of socioeconomic challenges before 2020, which were exacerbated by the pandemic-related economic shock. Labor markets are recovering albeit unevenly across population segments and incomes declined below pre-pandemic levels for a large share of workers. In addition to these issues, consumer prices soared spurred by the impact of Russia's invasion of Ukraine, triggering a country-wide wave of protests, which highlighted the need for more focused social policies.

Social Indicators Prior to Covid-19

1. Social indicators in Panama have improved markedly over the last few decades. The poverty rate declined from 35 percent in 2000 to 12 percent in 2019—a much faster pace than elsewhere in the region. At the same time, the Gini index, a measure of inequality, dropped from 56.6 to 49.8, pointing to a more equitable income distribution. Life expectancy and infant mortality also improved dramatically.

uA001fig20
Source: World Development Indicators.

2. Despite this progress, Panama's social indicators are still weak relative to peers. Panama lags the peers in its income group in many aspects of social policy, such as education, health, gender equality and social inclusion1.

3. Panama's human capital index score is low relative to its income level. Panama's 2020 Human Capital Index, which measures the amount of human capital that a child can expect to attain by age 18 given the country's health and education systems, was on par with countries with much lower level of economic development and per-capita income. In the latest 2018 Program for International Student Assessment (PISA),2 Panama ranked 71 out of 77 countries.

Social Indicators During the Pandemic

4. Panama's unemployment rose sharply during the pandemic, reaching its highest rate since 1989. The World Bank survey showed that 35 percent of those employed before the pandemic either became unemployed or left the labor force altogether3.

5. Moreover, the share of formal employment in total employment declined sharply. While nearly all the countries in Latin America and the Caribbean saw a decline in formal employment as a share of total employment during the pandemic, that change was the most pronounced in Panama, at 22.7 percentage points relative to pre-pandemic levels. Already-vulnerable groups, including women, the elderly and the less educated, were most affected.

6. Social assistance programs did not fully compensate for pandemic-related income losses, leading to an increase in poverty. The World Bank estimates that Panama's emergency social assistance program (Panama Solidario) was insufficient to compensate for pandemic-related income losses. Even though nearly 70 percent of households reported receiving emergency transfers by mid-2021, household income remained below pre-pandemic levels for 58 percent of households, according to a survey, and a quarter of the responding households reported running out of food.

7. Gender gaps widened during the pandemic. The female population was disproportionately affected by the increased burden of care, with 39.3 percent more women than men reporting an increase in time spent attending to children's education needs during the pandemic. Increased household burdens coupled with a higher incidence of job losses placed Panamanian women at an even more disadvantaged position to men than before the pandemic.

uA001fig21
Sources: World Bank and UNDP LAC High Frequency Phone Surveys, Phase II, Wave 1.

8. The pandemic also led to a deterioration of human capital and widened the gap in educational attainment between the poor and the wealthy students, the result of the limited reach of remote learning, differences in teaching quality and in-home learning support. The World Bank reports that the pandemic-related gap in school attendance between children coming from high-educated and low-educated households was almost 20 percentage points.

Recent Protests

9. Rising fuel and food prices triggered large-scale protests across the country in July 2022. On July 4, 2022, a group of teachers from ANADEPO (representing over twenty educational, civil, farming, transportation, and student associations) and AEVE (a teachers' union) blocked key transportation routes between eastern and western Panama, with their key complaints being the high cost of gasoline at the pump (Panama is a fuel importer), and rising food and medicine prices. Organizations such as SUNTRACS, a construction workers' union, and COONAPIP, a group of indigenous organizations, joined the nationwide strike by mid-July, with various civic groups, organizations and private individuals following suit. Protesting groups eventually united into a single table for dialogue with the government (Mesa de Diálogo), proctored by the Catholic Church.

10. In response, the government lowered gasoline prices and introduced selected price freezes. The Cortizo Administration announced a fuel price freeze at US$3.95 per gallon for gasoline and diesel, effective July 15, and on July 17, agreed to reduce fuel prices further, to US$3.25 per gallon.4 It also agreed to freeze the prices of 72 staple products, suspend tariffs on targeted goods which included food and healthcare-related items, and extend pandemic-related social support transfers beyond their scheduled expiration in June 2022.

11. The protesters' other concerns include addressing corruption (especially in the Legislative Assembly) and government wastefulness, and compliance with the law mandating 6 percent of GDP spent on education in 2023 (which has been historically low compared to peers and estimated around 4.5 percent of GDP for 2022).

12. Protests of this magnitude are atypical for Panama. The recent episode of social unrest is estimated to be the most significant one in Panama over the last three decades. It affected the entire country and was fueled by populist support (according to a public poll, 74 percent of respondents approved of the protests by mid-July). While official reasons for public discontent included rising inflationary pressures, some analysts point out that general uncertainty in the world economy, languishing labor markets and cumulating dissatisfaction with socioeconomic conditions in the aftermath of the pandemic “provide the breeding ground for popular uprisings” and may have also motivated protesting activity.5

Annex VII. What Caused Panama's Sharp 2020 Contraction?

1. Panama experienced one of the world's sharpest GDP contractions. Panama's output shrank by 17.9 percent in 2020 – its largest contraction in recorded history and the first since 1988 (when output fell by 13.4 percent amid a major political crisis preceding the 1989 US invasion). Compared to regional peers, Panama's GDP shrank by the most. Moreover, from the global perspective, Panama's pandemic-related output loss was among the 10 largest.

2. The decline was not the result of the large share of services in Panama's GDP. Panama's GDP decline was much larger than in countries with similar or higher shares of services in their GDP. Moreover, the link between the share of services and the shortfall of GDP was very weak. While some types of services, including those related to hospitality and food services, travel, retail and other contact-intensive services (beauty, indoor recreation and culture, group childcare, etc.) were severely affected by pandemic-related containment measures and temporary closures, other services shifted to online platforms (including education, telemedicine, counseling, religious services, etc.) and yet others thrived during covid (health services, in-home care, shipping and delivery, digital infrastructure design and support, etc.).

3. An important factor behind the deep slump was the sharp drop in investment. Growth rates of gross domestic investment and output in Panama appear to be fairly well correlated and drops in the former coincide with pronounced declines in the latter. Investment declined by 50 percent in 2020—a massive collapse both relative to Panama's own history and by international standards: a rate usually observed in deep capital account crises.

4. This drop in investment was in large part the result of a drop in construction activity which was severely affected by pandemic-related closures. In response to public health concerns, the authorities promptly declared a national emergency, ordered mandatory quarantine with a curfew and movement restrictions, suspended all construction projects except for health-related, closed schools, canceled public events, and banned all commercial flights (except cargo and humanitarian). Monthly working hours were reduced by half. Notably, the pandemic forced the government to suspend all construction activity—Panama's engine of investment and growth since the 2000s—for about six months. In contrast, in some countries construction was considered “essential business” and was not considerably interrupted by counter-covid measures.

5. It is likely that not all of the slump in construction activity was due to covid-related containment measures. The construction boom started to wane before the pandemic, in 2018-19, as investment levels declined slightly along with the number of building permits and major infrastructure projects came to completion. Construction activity was also impacted by rising input costs and supply bottlenecks as well as labor shortages. According to the Bureau of Labor Statistics, price increases for inputs to construction and goods industries were much larger during the pandemic than were price increases for inputs to services industries. For example, input costs for wood products climbed by 22.6 percent between May 2020 and April 2021, while output costs surged by 44.6 percent over the same period, spurred by increased demand amid limited capacity to meet this demand.

uA001fig22

Factors behind the Large Decline in GDP in 2020

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: Johns Hopkins, World Economic Outlook, World Bank and IMF staff calculations.

6. Construction activity has been recovering but remains well below pre-pandemic levels (investments for building works in the first nine months of 2021 were 40 percent above 2020 levels over the same period, but still 39.2 percent below what was reported in 2019). Some of the recovery may be due to the re-initiation of postponed projects, with the rest representing new demand for construction. It remains to be seen whether construction regains its pre-pandemic role as the engine of Panama's growth and investment but the slowdown in activity before the pandemic may signal that the “construction supercycle” has come to an end, calling for a shift of labor and capital inputs into other high value-added sectors.

uA001fig23

Panama’s Construction Industry: Contributions to GVA Growth and GDP Share

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Sources: CEIC database, INEC and IMF staff calculations.

7. An increase in mining activity only partly offset the impact of the decline in construction. Panama's copper mine, Cobre Panama, is the biggest private investment project in the nation's history, surpassing the Canal expansion, and one of the world's top copper-producing mines. Its commercial production started in September 2019; since then, the share of mining and quarrying in the country's output increased to 2.5 percent of GDP in 2019 (from 1.9 percent in 2018), 3.7 percent of GDP in 2020 and 5.8 percent of GDP in 2021. The expansion of mining activity offset some of the output losses due to the slump in construction, but only to a limited extent as construction shares in Panama's GDP ran in double digits since 2012, peaking at 18.3 percent in 2018, and declining to 13.2 percent in 2021 – still more than double the share of mining.

Annex VIII. Panama's Climate Policy Options

1. Panama remains committed to climate policy. The authorities made an allocation of US$100 million in 2020 to support its population affected by natural disasters following Hurricane Eta and tropical storm Iota, and continue to build resilience through various adaptation and mitigation strategies.1 In addition, they have a committed amount of US$100 million from The World Bank through a with a Catastrophe Deferred Drawdown Option (Cat-DDO) which supports technical and institutional capacity to manage disaster risks from the adverse effects of climate change and disease outbreaks.2

2. Effective management of water resources will become a strategic priority for Panama. To the extent that climate change increases rainfall volatility, Panama will need more careful management of the fresh water it derives from precipitation. Key sectors of the economy, most prominently agriculture and transit through the Panama Canal, crucially rely on a constant supply of fresh water. Yet, the two main reservoirs that supply the Canal and a large share of the population have occasionally reached worryingly low levels, and the local distribution system is estimated to lose more than 40 percent of the transported water due to widespread leakages. A combination of actions could help stabilize the amount of available fresh water for business use and household consumption: the desalinization of sea water, the construction of a third reservoir, efficiency improvements and repairs to the existing distribution network, as well as a revision of public water fees, which have been kept unchanged at a low level since 1982.3

3. Panama has set an ambitious net-zero target for carbon emissions in 2050. To this end, multiple policies and coordination among both private and public stakeholders will be needed as the country makes this historic transition. Figure A8.1 focuses on the effects of one such policy instrument that could achieve both a gain in revenues and a reduction in emissions. Using IMF's new Climate Policy Assessment Tool (CPAT), staff estimated that the introduction of a carbon tax in 2024 gradually bringing the price of carbon to 50 real US$ per ton of CO2 equivalent by 2030 could raise between 0.1 and 0.6 percent of GDP in government revenues each year over the following decade, while reducing baseline emissions by up to 5 million tons in CO2 equivalent and raising net welfare by 0.6 percent of GDP by the end of the same period.

Figure AVIII.1.
Figure AVIII.1.

Panama: Effects of a Carbon Tax that Gradually Brings Carbon Prices from 20 to 50 Real US$ per tCO2e between 2024 and 2030

Citation: IMF Staff Country Reports 2023, 122; 10.5089/9798400237942.002.A001

Source: IMF calculations based on the Climate Policy Assessment Tool (CPAT).

Annex IX. Recent Progress towards Exiting the FATF Grey List

1. Addressing the deficiencies in Panama's AML/CFT regime is a key policy priority for the authorities. To move the agenda forward, the government made new key appointments on the national AML/CFT team in 2021-22. Steps taken by the authorities to address FATF's concerns (identified in the action plan) included (i) applying risk-based supervision to the designated non-financial business and professional sector; (ii) using the Practical Guide for Parallel Financial Investigations; (iii) approving Law 254, which resolved certain legal impediments to implementing several remaining action items in the FATF action plan; (iv) updating the sectoral risk assessment; (v) implementing the SSNF1 Supervision Manual; (vi) enhancing risk-based monitoring and supervision of corporate sector; (vii) focusing on money laundering investigations in high-risk areas; and (viii) designing and implementing a digital platform to collect ultimate beneficial ownership (UBO) information for active firms incorporated in Panama.

2. To exit the FATF grey list, three action items remain to be upgraded to “largely addressed.” Specifically, remaining action items on Panama's action plan include:

  • ensuring adequate verification of up-to-date UBO information by reporting entities and timely access by competent authorities;

  • establishing effective mechanisms to monitor the activities of offshore entities and further implementing the specific measures to prevent the misuse of nominee shareholders and directors; and

  • demonstrating the country's ability to investigate and prosecute money laundering involving foreign tax crimes.

3. To address these three remaining items, specific actions have been taken.

  • As of February 8, 2023, the UBO registry contained UBO information on 78,637 companies, or close to 33 percent of total active firms. Notably, the two largest law firms have uploaded over 90 percent of their registered companies, representing important progress from a risk-based perspective. The digital platform has already entered verification phase in 2022-Q42, and competent national authorities have been granted access to the UBO information.

  • On July 28 2022, the SSNF issued Resolución JD-02-2022, applicable to lawyers and certified public accountants, addressing the AML/CFT preventive measures and obligations applicable to these professionals. The Resolución also establishes specific measures of control to prevent the misuse of nominee shareholders and directors, when lawyers operating in PAN render these services.

  • Within the last two years, the authorities started nine investigations related to foreign tax crimes. Out of these nine cases, seven remain at preliminary investigation stages, while one advanced significantly, and one resulted in an international warrant.

4. The SSNF expanded its resources and supervisory activities. To hasten the UBO registration and verification process, the SSNF expanded its budgetary and human resources: its 2023 budget rose to US$10.7 million from US$2.4 million in 2019 (by 4.5 times), with special funds (US$3.6 million in 2023) earmarked for the UBO registry. In 2022, staffing to support the UBO platform increased from one in April to six in December (and a projected rise to 13 in 2023). New staff members have been tasked with training law firms/resident agents and uploading company and related UBO information to the registry. As a result, the pace of registering new companies in the platform increased in 2022-Q3 and Q4. The number of supervisions and sanctions also increased this year. Onsite supervisions conducted by SSNF as of November 2022 increased 96 percent relative to 2021, while offsite supervisory activities increased by 1571 percent over the same period. The number of sanctions rose from 1 (in the amount of US$5,000) in 2019 to 16 in 2022 (US$491,845).

Annex X. The Risks of Disruptions in Mining Activities

Background

1. The Cobre Panamá copper mine project was started in 1997 by Minera Panamá, currently the local subsidiary of the Canadian firm First Quantum Minerals. In February 1996, the Government of Panama and Minera Panamá , agreed on a 20-year mining concession for the Cobre Panamá copper mine project.1 The National Assembly approved Contract-Law No. 9 in February 1997, conveying the status of national law to the mining concession. The duration of the concession was extended by ministerial resolution in December 2016 for an additional 20-year period. Total investment so far has been at least 10 billion dollars, according to Minera Panamá's Financial Statements.

2. In December 2017, the Supreme Court of Panamá ruled that Law No. 9 was unconstitutional as the National Assembly had failed to consider whether it complied with applicable legislation at the time.2 The government presented a new Law to comply with the Court's ruling, but it has not yet been approved by the National Assembly.

3. The project continued despite the legal and political uncertainties. Production began in June 2019 and reached full capacity in 2021, with plans for further expansion. The mine is estimated to produce 400,000 tons of copper, 150,000 oz of gold, and 3,500 tons of molybdenum each year for at least the coming 10 years, gradually declining afterwards, with a mine life of more than 30 years. According to INDESA, an economic advisory firm, Minera Panamá's direct contribution to Panama's GDP is about 3.2 percent, and its indirect contribution another 1.6 percent. Copper exports accounted for 4.4 percent of GDP in 2021.

4. Under the Law-9 concession, the company is required to pay a 2 percent royalty on a net smelter return basis3, but is exempt from most other taxes (except for social security contributions on employee wages) as long as it has an outstanding debt related to the project.

Recent Developments

5. The government is of the view that Minera Panamá has been paying less than its fair share due to the tax holiday and has reopened negotiations about the concession. To ask for fairer terms, the government reopened negotiations with Minera Panamá about the concession, proposing a new contract in January 2022 ending the tax holiday and reinstating corporate income taxes at the standard 25 percent rate, the general withholding regimes, and royalties of 12-16 percent of the operating margin with some cost deduction exclusions. A required yearly minimum payment would seek to guarantee that the sum of corporate income taxes, withholding taxes, and royalties is always greater than or equal to US$375 million.

6. According to Minera Panamá, the current royalties at 2 percent of revenues are above the average royalty rate expected from a mine of the same ore grade, based on an analysis from KPMG on mines in the Americas. The company also argues that since it still has outstanding debt, the original contract conditions should remain unchanged.

7. Negotiations failed to meet the deadline set for December 14, 2022. On December 15, 2022, the government asked Minera to prepare a “care and maintenance” plan for the suspension of mining activities to be presented within 10 business days. Negotiations resumed in late December.

Disruption of mining activities and economic implications

8. Thus far, there has not been any impact on copper production. Copper mining activities continue as negotiations are ongoing and the “care and maintenance” plan has not been implemented pending the government's decision on Minera's appeal.

9. However, the conflict has increased the risk of disruptions to mining activity and shipments.

  • Using INDESA's estimates of the direct contribution of Minera to GDP, a one quarter suspension of mining activity would reduce annual GDP growth by 0.8 percentage point. The provinces of s of Coclé and Colón would be particularly affected.

  • Cobre Panamá is estimated to provide around 41 thousand direct and indirect jobs and interact with 1,800 suppliers.
1

See the accompanying Selected Issues Paper “Panama's Growth Story”.

2

Construction as a share of GDP (i.e., domestic value added) peaked at 20.0 percent in 2018. In the same year, investment in construction amounted to 32.4 percent of GDP, of which 10.3 percentage points was for residential building; 12.1 for other buildings and 10.7 in other constructions and works (Figure 13).

3

Panama's covid-19 death toll (1,900 per million) is higher than that in the region, but below the US, Europe, and South America.

4

See Annex VI for details.

5

Construction was shut down for six months, contributing to a 50 percent decline in investment (Annex VI).

6

The SRFL prescribes a gradual reduction in the NFPS deficit, from 101/2 percent of GDP in 2020, to 7-71/2 percent of GDP in 2021, to 4 percent of GDP in 2022, converging to 1.5 percent of GDP in the medium term.

7

Under the swap, a major global bank paid part of the interest payments on global bonds in 2022. These cashflows were subtracted from the interest payments shown in the (cash-based) public finances.”

8

The External Balance Assessment (EBA)-lite model shows a current account norm of -2.7 percent of GDP.

9

Panama's banking sector comprise domestic and international banks. Domestic banks (general license, local and foreign ownerships) dominate the banking sector; their business model revolves around providing credit and financial services, with insignificant exposures to derivatives. International banks are usually subsidiaries of large regional and global banking groups.

10

Loan-loss provisions stood at 144 percent of NPLs at end-September 2022.

11

This will add about 0.4 percent of GDP to government annual interest costs by 2027. Every 100 bps higher interest rates add 0.2 percent of GDP to annual interest costs by 2027.

12

External wholesale deposits only account for 7 percent of total deposits in the banking system.

13

Banks' exposure to the government amounts to 9 percent of total assets.

14

As of October 2022, the average deposit and lending rates stood at 1.5 percent and 7.6 percent, respectively, somewhat below their 20-year averages of 2.35 percent and 8.05 percent, respectively.

15

In 2019, according to Statista, inbound tourism accounted for 10.6 percent of GDP. In the second and third quarter of 2020, BOP personal travel services credits dropped to zero. In 2022Q1, they rebounded to 80 percent of 2019Q1 levels.

16

The approved budget does not include proceeds from the new tax on digital platform purchases and the impending new agreement with Minera Panamá, but is more optimistic than the staff on indirect taxes and capital revenues.

17

According to Panama's education laws, the government budget should allocate 6 percent of the previous year's GDP to the education sector. The government plans to do so by 2024. In 2023, education spending will increase to 5.77 percent of 2022 GDP from 5.4 percent of 2021 GDP.

18

The baseline assumes that tax revenue will increase by 0.8 percentage point of GDP between 2023 and 2028 because of existing tax administration initiatives (including the establishment of LTU) and a cyclical rebound in revenues from the pandemic. It further assumes that the central government spending-to-GDP ratio reverts to pre-pandemic levels through restraint in the growth of the public wage bill and public consumption. Central government transfers to the CSS gradually increase over time to fully cover the deficit in the defined-benefit component of the pension system (note that this does not affect the deficit of the non-financial public sector).

19

The government does not publish medium-term revenue and expenditure projections underlying the deficit target.

20

Planned IMF Technical Assistance (TA) aims to strengthen the effectiveness of the Customs administration through the implementation of an information exchange agreement with the tax administration and the streamlining of main customs processes.

21

The deficit of the defined benefit pension system of about 1.1 percent of GDP in 2022 is partly offset by surpluses in other programs of the CSS, but current regulations disallow cross-subsidization. The overall CSS deficit of about 0.7 percent of GDP is projected to remain relatively constant over the next few years.

22

Options include parametric reforms, such as raising the retirement age for not-yet retired participants, and finding of new funding sources.

23

TA in the area of public financial management focuses on multi-annual budget preparation and management of fiscal risks. Work priorities for 2023 include the application of the IMF Fiscal Risk Assessment Tool, enhancing the registration of accounts payable, and the implementation of the new budget administration law. Areas of weakness that remain to be addressed are government procurement and fiscal transparency, including in the context of publication requirements of key budget and procurement documents and covid-related spending.

24

Total assets amount to 210 percent of GDP. The sector contributes around 6.5 percent to GDP each year.

25

Currently, the main broad-based macroprudential measures are dynamic provisioning and a minimum requirement for the leverage ratio. The SBP is planning to introduce capital conservation buffer and systemic bank surcharge in the medium term, and is considering countercyclical capital buffer.

26

The FES is a $1 billion financial stability fund. It comprises an emergency liquidity window to support banks ($500 million) and a credit facility to stimulate the economy. It is owned by the MEF and operated by BNP.

27

This reflects low scores on standardized tests.

28

The Worldwide Governance Indicators (WGI) estimate ranges from -2.5 (weakest) to 2.5 (strongest), with zero corresponding to median governance performance.

1

The LCR is Based on Basel III whereby banks are required to hold an amount of high-quality liquid assets that is enough to fund cash outflows for 30 days whereas the Legal Liquidity Index (LLI) defines a 30 percent minimum requirement on liquid assets (including cash and certain debt securities) as a share of qualifying deposits, with a time horizon of 186 days.

1

The Risk Assessment Matrix (RAM) shows events that could materially affect the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff's subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability of below 10 percent, “medium” a probability of between 10 and 30 percent, and “high” a probability of between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. ST and MT stand for the “short-term” and “medium-term”, indicating that the risk could materialize within 1 year and 3 years, respectively.

1

See Social Issues in Panama: Background and Policies (IMF Country Report No. 20/125).

2

The 2021 PISA was rescheduled to 2022 due to the covid-19 pandemic.

3

According to a World Bank survey, over one in every three workers lost their jobs. (World Bank and UNDP LAC 2021 High Frequency Phone Surveys, Phase II, Wave 1.0 (collected between May and July 2021, with findings reported in April 2022). The jobless disproportionately included those with low education levels, females with young children, and the elderly. The pandemic also affected job quality, with more than one out of five formal workers becoming informal in 2021. The poverty headcount increased from 12.1 percent of the population before the pandemic to 14.8 percent in 2020.

4

At the end of June, a gallon of gasoline cost between US$4.80 and US$5.25, while diesel cost US$4.75 per gallon.

5

“Three weeks into the social uprisings: causes, consequences, and perspectives” by Marco Fernandez (Global Source Partners).

1

Panama's geographic location exposes it to the increasing frequency and intensity of multi-hazard events, including El Niño and La Niña. Annex 10 of the 2021 Article IV provides further details on mitigation and adaption strategies.

2

The World Bank Cat-DDO instrument enables countries to immediately access a prearranged amount of funding upon declaration of a State of Emergency due to a natural or climate-related hazard or health emergency.

3

See April 2020 Selected Issues Paper “Structural Policies in Panama: Background and Policy Recommendations” by Julia Faltermeier, IMF Country Report No. 20/125.

1

The Superintendency of Nonfinancial Subjects (SSNF by its Spanish acronym) was created in 2020 to regulate the designated nonfinancial businesses and professions.

2

On November 7th, SSNF approved a risk-based approach mechanism for validation and verification of UBO information, implemented through the creation of a task force, composed by 4 supervisors of the Supervision Directorate and 2 analysts of the UBO Directorate. A specialized unit has been created solely within the Supervision Directorate for BO verification purposes.

1

This mine project was owned by Inmet Mining until 2013 when this company was taken over by First Quantum Minerals Ltd. Inmet originally owned Minera Panamá. In 2012, it sold a 20 percent stake to a Korean holding company (KPMC). In 2013, First Quantum acquired Inmet through a hostile takeover bid, which gave it the remaining 80 percent stake in Minera Panamá and control over the Cobre Panamá project. In 2017, First Quantum raised its ownership stake to 90 percent.

2

The case had been filed in 2009. The Court made the ruling public in September 2018. It became effective in December 2021, when it was published in the Official Gazette.

3

The base for the royalty is defined in Law No. 9 as “the gross amount received from the buyer due to the sale (of concentrates) after deduction of all smelting costs, penalties and other deductions, and after deducting all transportation costs and insurances incurred in their transfer from the mine to the smelter”.

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Cover IMF Staff Country Reports
Panama: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Panama
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2023: Issue 122
Publisher:
International Monetary Fund
ISBN:
9798400237942
ISSN:
1934-7685
Pages:
97
DOI:
https://doi.org/10.5089/9798400237942.002

Change in Real Investment in 2020

(Percent)

Distribution of Average Construction to GDP Ratio, 2015-19

(Number of countries within each range)

Real GDP Growth in 2019 and 2020

(In percent)

Covid-19

Real GDP According to Various Vintages

(2017=100)

NFPS Balance

(Percent of GDP)
Figure 1.

Panama: Banking Sector

Modified Loans and Nonperforming Loans

(In percent of total loans)

Local Credit and Deposits

(Percent change, y/y)

Bank Lending By Sectors

(In Percent)

Business Cycle: A Recovery from Unprecedented Shock
Figure 2.

Panama: Panama Canal

Public Capital Expenditures

Human Capital and Governance Indicators1/

Governance Indicators1/

(Higher is better)
Figure 3.

Panama: Real GDP and Production Factors

(In constant US dollars)
Figure 4.

Panama: Real Sector Developments
Figure 5.

Panama: Fiscal Developments
Figure 6.

Panama: External Sector Developments
Figure 7.

Panama: Banking Sector Soundness
Figure 8.

Panama: Balance of Payments
Figure 9.

Panama: Central Government Finances

(Percent of GDP, four quarter totals)
Figure 10.

Panama: Central Government Finances

(US$ millions, four quarter totals)
Figure 11.

Panama: General Government Finances

(US$ millions, four quarter totals)
Figure 12.

Panama: Balance of Payments
Figure 13.

Panama: Investment by Activities
Figure 14.

Panama: Construction – Comparison between Countries

(Percent of GDP)
Figure 15.

Panama: Labor Markets
Figure AIII.1.

Panama: External Debt Sustainability—Bound Tests 1/2/

(External debt in percent of GDP)
Figure AIV.1.

Panama: Risk of Sovereign Stress
Figure AIV.2.

Panama: Debt Coverage and Disclosures
Figure AIV.3.

Panama: Public Debt Structure Indicators
Figure AIV.4.

Panama: Baseline Scenario

(In percent of GDP unless indicated otherwise)
Figure AIV.5.

Panama: Realism of Baseline Assumptions
Figure AIV.6.

Panama: Medium-Term Risk Analysis

Modified to Total Loans Ratio and New COVID-19 Cases

(In percent and number of cases, respectively)

Factors behind the Large Decline in GDP in 2020

Panama’s Construction Industry: Contributions to GVA Growth and GDP Share
Figure AVIII.1.

Panama: Effects of a Carbon Tax that Gradually Brings Carbon Prices from 20 to 50 Real US$ per tCO2e between 2024 and 2030