20230323-IMF-Panama_2022_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Panama_97页_2mb

2022 Article IV Consultation with Panama Summary

Core Content

The 2022 Article IV Consultation with Panama, conducted by the IMF, assessed the country's economic recovery post-pandemic, outlined the outlook and risks, and provided policy recommendations to ensure sustainable growth and financial stability. The consultation was completed in February 2023, following discussions in December 2022.

Main Economic Developments

• Pre-pandemic Growth: Panama experienced a significant construction and investment boom in the decade-and-a-half before the pandemic, leading to rapid GDP growth (6% annually), declining poverty, and income convergence with advanced economies.
• Pandemic Impact: The pandemic caused a severe economic contraction, with real GDP declining by 18% in 2020 and unemployment spiking to 18.5%.
• Post-pandemic Recovery: The economy rebounded strongly in 2021 with a 15.3% GDP growth and is projected to grow by 9% in 2022. Inflation remained relatively low compared to other countries.
• Fiscal Performance: The fiscal deficit declined from 10.4% of GDP in 2020 to 4% in 2022. Central government gross debt is estimated at 60% of GDP at the end of 2022.
• Banking Sector: Banks are well capitalized and liquid. The IMF approved a two-year Precautionary and Liquidity Line (PLL) arrangement in January 2021 for 500% of quota, equivalent to $2.7 billion.

Outlook and Risks

• Growth Outlook: Economic growth is expected to slow to 5% in 2023 and remain at 4% in the medium term.
• Key Risks:
  • A sharper-than-expected global economic slowdown.
  • Renewed surges in global food and energy prices.
  • Rising global interest rates.
  • Disruptions in global capital markets.
  • Panama's continued inclusion in the FATF grey list and the EU non-cooperative jurisdictions list.
  • Potential disruptions in copper mining activities due to failed negotiations for a new contract.

Policy Recommendations

• Rebuilding Fiscal Buffers: Policies should focus on reducing the fiscal deficit while maintaining social spending and creating room for new investments, particularly in education.
• Strengthening Financial Integrity: Addressing the remaining deficiencies in the AML/CFT regulatory framework is critical for exiting the FATF grey list.
• Enhancing Financial Sector Oversight: Improving the efficiency of tax and customs collection, broadening the tax base, and addressing pension system deficits are essential.
• Sustaining Convergence: Other productive sectors must take over from construction to support long-term growth. Governance and human capital should be strengthened.
• Improving Statistics: Implementation of the national statistical plan will enhance the quality and timeliness of macroeconomic data.

Key Economic and Social Indicators

Indicator	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028
Real GDP (Percent Change)	3.7	3.0	-17.9	15.3	9.0	5.0	4.0	4.0	4.0	4.0	4.0
Consumer Price Index (Average)	0.8	-0.4	-1.6	1.6	2.9	2.2	2.2	2.0	2.0	2.0	2.0
Consumer Price Index (End-of-Year)	0.2	-0.1	-1.6	2.6	2.1	3.1	2.0	2.0	2.0	2.0	2.0
Output Gap (% of Potential)	4.2	2.0	-17.1	-6.3	-0.9	0.0	0.0	0.0	0.0	0.0	0.0
Revenue and Grants (Percent of GDP)	22.0	20.8	21.5	20.5	22.2	23.1	23.3	23.5	23.6	23.8	23.9
Expenditure (Percent of GDP)	24.9	23.9	30.7	27.1	26.0	25.8	25.1	24.6	24.5	24.7	24.9
Current Account (Percent of GDP)	-7.6	-5.0	-0.4	-3.2	-3.9	-4.0	-3.5	-3.0	-2.8	-2.7	-2.5
Public Debt (Percent of GDP)	37.3	41.9	65.6	58.4	55.4	54.9	54.1	53.2	52.4	51.5	50.8

Key Sectors and Trends

• Construction and Investment Boom: A major driver of growth before the pandemic. The construction-to-GDP ratio was significantly higher than in other countries.
• Services and Logistics: Grew due to the expansion of the Panama Canal.
• Copper Mining: A large mine was constructed, but delays in contract negotiations have created risks.
• Banking Sector: Played a key role in financing construction and residential projects. Mortgage and construction loans now account for 42.7% of total lending.
• Fiscal Rule: The public sector deficit is below the 7.5% of GDP limit, but further reductions are needed to ensure debt sustainability.

Conclusion

The IMF Executive Board endorsed the staff appraisal and emphasized the importance of addressing the remaining issues in the AML/CFT framework to exit the FATF grey list. They also called for continued supervision of the financial sector and structural reforms to enhance competitiveness and long-term growth potential. The recovery has been strong, but the outlook remains uncertain due to external and domestic risks. Sustaining income convergence and improving transparency through timely data are critical for Panama's future economic stability.