Press Release No. 97/56

Press Release: IMF Approves Three-Year Extended Fund Facility for Panama

December 10, 1997

The International Monetary Fund (IMF) today approved a three-year credit for Panama equivalent to SDR 120 million (about US$162 million) under the Extended Fund Facility (EFF)¹ to support the government’s medium-term economic reform program for 1998-2000.

Background

During the first half of the 1990s, the Panamanian economy recovered from the adverse effects of the political crisis of the late 1980s. In 1995, the government, with the support of the IMF and other multilateral institutions, embarked on a market-based medium-term strategy to achieve sustainable growth in output and employment while at the same time reducing poverty.

Bold structural reforms were carried out in the areas of privatization, deregulation, and trade, in the context of fiscal consolidation. That strategy has had a major impact on the economy and private sector investment. Since 1996 real GDP growth, which had slowed after the strong recovery of the early 1990s, has begun to increase, and inflation has remained low, as public finances also have been strengthened through a major debt restructuring.

In order to consolidate the recent economic gains and further increase economic growth, the authorities have decided to carry out additional substantial reforms to remove the remaining impediments to economic efficiency and private sector investment.

Medium-Term Strategy

The authorities’ economic program through 2000 will deepen and broaden structural reforms within the context of continued prudent fiscal policy and low inflation, with the objective of promoting sustainable output and employment growth and reducing poverty. The program aims at raising GDP growth to 5 percent by the year 2000 from 2½ percent in 1996, while holding inflation at about 1½ percent a year.

Reflecting the temporary cost of certain structural measures, such as privatization and pension reform, the overall balance of the public sector will show small deficits in 1998-99 before shifting to growing surpluses beginning 2000. The overall deficit of the public sector is projected to narrow to 0.5 percent of GDP in 1999 and shift to a surplus of 0.6 percent in the year 2000 through current expenditure restraint and implementation of a comprehensive tax reform in the latter part of 1999. The small overall public sector deficit during 1998-99 will be more than covered by external project and policy loans. The external current account deficit will widentemporarily during the program period mainly because of a rise in investment-related imports, and is expected to be virtually covered by net capital inflows.

Structural Reforms

Structural measures will focus on further privatization, import tariff reduction, and financial sector reform during the first half of the program period. Reforms relating to taxation, civil service, and social security will be implemented during the second half of the program period.

The authorities are committed to implementing an ambitious privatization program, which includes the sale of several public entities ranging in scope from casinos to airports and public utilities. Following the lowering of tariffs on certain imports, in July 1997, a new round of substantial tariff reform will take place to further increase transparency and efficiency in order to attract foreign investment. In this context, the authorities announced recently that effective January 1, 1998 the maximum tariff rate will be reduced to 15 percent on all imports from the present 40 percent on consumer goods and 60 percent on agricultural goods with a few exceptions. In cooperation with the private sector and with assistance from the IMF and the Inter-American Development Bank, the authorities intend to modify the existing Banking Law by March 1998 to strengthen banking supervision and to allow trading in new financial instruments.

A comprehensive tax study is expected to be completed in 1998 and its recommendations implemented in the second half of 1999, to further improve tax collection by the year 2000. A voluntary and self-financed private pension plan will replace the underfunded supplementary civil service pension fund, with a view to strengthening the fiscal position and creating a more equitable pension system.

Addressing Social Needs

The authorities intend to strengthen the social safety net for the most vulnerable groups in society. With the assistance of the World Bank, a living standard survey is being conducted to help identify poverty groups and assess the effectiveness of government policies in reducing the incidence of poverty, which affects 40 percent of the country’s population, mostly in rural areas. Efforts are also being made to improve efficiency in the provision of basic health and education service, through investment income from privatization proceeds.

The Challenges Ahead

The program represents a substantial effort to put Panama on a sustainable growth path. In this context, structural reforms would need to be implemented efficiently to minimize their initial fiscal costs. It is also important for the authorities to adhere to the timing for implementing the wide-ranging structural reforms and to stand ready to undertake fiscal action if necessary to prevent any diviation from the programmed fiscal path.

Panama joined the IMF on March 14, 1946. Its quota² is SDR 149.6 million (about US$202 million). Panama’s outstanding use of IMF financing currently totals SDR 98 million (about US$132 million).