Press Release No. 16/276

Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with Panama

June 10, 2016

On May 23, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Panama.

Panama has had the highest average growth in the region over the past decade and is expected to continue to have one of the strongest growth rates in Latin America, set against a backdrop of low inflation, a stable financial system, and a declining current account deficit. GDP grew by 5.8 percent in 2015, and growth is projected to remain around 6 percent in 2016 and over the medium term. The economy will be supported by the expected opening of the expanded canal and lower fuel prices, which will counterbalance the effects of slowing global growth and U.S. dollar appreciation. Over the medium term, the increase in canal transit, a dynamic service sector, and investments in the energy, mining, and logistics sectors should help maintain vibrant growth. Inflation is expected to remain subdued in 2016.

The overall fiscal deficit fell to 2.8 percent of GDP in 2015 and is expected to consolidate to 1.2 percent of GDP over the medium term. Public debt is projected as sustainable. Debt of the Non-Financial Public Sector was 39 percent of GDP in 2015 and is projected to fall below 35 percent of GDP over the medium term. The current account deficit, which declined significantly in 2015 to 6.5 percent of GDP, is expected to fall to 3 percent of GDP in the medium term, financed by broad-based foreign direct investment inflows.

Since the Financial Action Task Force (FATF) included Panama in the list of countries with strategic deficiencies in the area of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) in June 2014, the authorities implemented an action plan agreed with the FATF. The FATF recognized the progress by removing Panama from the list in February 2016. Going forward, Panama is scheduled to undergo an assessment against the prevailing 2012 FATF standard in mid-2017, where the focus will be on the effective implementation of the AML/CFT regime. In addition, after the leak of the documents from the law firm Mossack Fonseca in April 2016, the government has announced the creation of an independent commission of international experts to evaluate the practices of the Panamanian financial center and propose measures to strengthen transparency of the financial and legal systems. The government has also committed to the bilateral Automatic Exchange of Information related to tax matters, following the OECD’s Common Reporting Standards by 2018. In May 2016, the U.S. imposed sanctions under the U.S. Foreign Narcotics Kingpin Designation Act on the Waked Money Laundering Organization for laundering narcotics and other illicit proceeds. This action prompted Panama’s Superintendent of Banks subsequently to take operating control of a local bank that was designated by the U.S. authorities as part of that organization, and also triggered the opening of criminal investigations, taking control of a local brokerage house, and beginning extraordinary inspections of nonfinancial entities by the Panamanian authorities.

Strong integration with the global trade and financial system brings substantial benefits to Panama, but increases the country’s vulnerability to external shocks. A weakening of global growth could dampen canal revenues and precipitate weaker capital inflows. Tighter and/or more volatile global financial conditions would quickly feed into the local financial system. However, the strong fundamentals of the banking sector and the room to implement a countercyclical fiscal response would help mitigate the impact of either shock on the domestic economy. Evolving business models for banks, changes in capital regulations, concerns over compliance with international standards on financial integrity and transparency, and increased due diligence by foreign banks have curtailed some smaller Panamanian banks’ access to correspondent banks; the risk could be more extensive going forward.

Executive Board Assessment²

Directors commended Panama’s dynamic macroeconomic performance, set against the backdrop of low inflation and unemployment, and a declining current account deficit. While the medium-term outlook remains favorable, Directors noted that the uncertain external environment poses downside risks. Against this background, they encouraged further efforts to enhance financial transparency, strengthen the fiscal framework, build larger buffers, and promote inclusive growth.

Directors stressed the importance of strengthening the AML/CFT framework in line with international standards and ensuring its effective implementation, especially in light of recent revelations. While noting Panama’s removal from the FATF list of countries with strategic deficiencies in AML/CFT, they called on the authorities to improve financial integrity and transparency, which would place Panama in a strong position ahead of the next FATF assessment and safeguard Panama’s role as an international financial hub. Directors welcomed the authorities’ commitment to the automatic exchange of tax information and urged them to expand these agreements with other jurisdictions. Measures to mitigate the impact of de-risking were encouraged, but will require greater international efforts to fully address.

Directors underlined the need to continue strengthening the transparency and accountability of the fiscal framework. They encouraged the authorities to introduce mechanisms to enhance incentives for compliance with fiscal rules and promptly detect and correct slippages. Directors welcomed the authorities’ openness to introduce a multi-year budgeting process, establish an independent fiscal council, and safeguard capital spending. Pension reform is encouraged, given large unfunded future liabilities, and to preserve space for other components of public spending. Welcoming the authorities’ efforts to modernize revenue administration, Directors underscored the need to broaden the tax base, develop appropriate incentives for tax compliance, and refrain from tax amnesties.

Directors noted that Panama’s financial sector is generally healthy, while certain areas require greater vigilance. In the absence of a lender of last resort, they emphasized the need to develop contingency plans to address systemic shocks and to ensure larger liquidity buffers, including through an alignment of the liquidity regulation with the Basel III framework and the establishment of a temporary liquidity facility for banks. Directors encouraged the authorities to fully implement FSAP recommendations, enhance cross-border supervision and systemic risk monitoring, and strengthen supervision of nonbank financial institutions.

Directors highlighted that human capital enhancements are essential for sustaining high and inclusive growth and encouraged the authorities to move forward with the envisaged measures to improve education quality, reduce skills shortages, and strengthen productivity. They welcomed the significant poverty reduction over recent years, while underlining that social assistance will be essential to address the needs of the indigenous and other socially-vulnerable groups for achieving more inclusive growth.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

² At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.