IMF Executive Board Concludes Consultation with Panama

by Phillip Morton, Investors Offshore.com

08 July 2009

On June 1, 2009, the Executive Board of the International Monetary Fund (IMF) concluded an Article IV consultation with Panama.

The IMF’s mission found that strong economic fundamentals helped contain the adverse impact of the global economic downturn and financial turmoil in Panama. Its preliminary findings showed that real GDP in 2008 grew by 9.2%, following an annual average growth of 8.8% in 2004-07. However, a decline in global trade and tighter credit conditions are becoming evident and real growth in 2009 is projected to slow to 3%. The high-growth period has led to a significant fall in poverty and a sharp decline in the unemployment rate, from 10.9% at the end of 2003 to 4.2% in August of 2008. Inflation, after peaking at 10% in September 2008, driven by the spike in international food and fuel prices and demand pressures, has since declined rapidly and reached 3.7 % in March 2009. The external current account deficit widened to 12.5% of GDP in 2008, which the IMF accredited to the fact imports grew relatively fast against slowing exports, particularly within the Colon Free Zone as well as a decline in external demand.

Panama’s large banking system has weathered the global financial crisis relatively well, according to the IMF. It’s findings show the system is well-capitalized, highly liquid, and has strong financial soundness indicators. The IMF also added that recent assessments by the Superintendency of Banks have not revealed exposure to complex structured assets. Following the intensification of the global financial crisis in September 2008, access to foreign credit lines declined, but the situation stabilized, and deposits and credit have been broadly stable in Panama, according to the IMF. The IMF also noticed that at the same time, banks have increased their liquidity partly to self-insure and in response to higher perceived risk.

Data on Panama’s public finances remained on strong footing and the non-financial public sector had a positive balance for the third subsequent year, albeit more modest than in 2007, according to the IMF.

Excluding the Panama Canal Authority (ACP), the non-financial public sector surplus in 2008 was equivalent to 0.4%. Continued robust revenues enabled a further large increase in public investment — from 5% of GDP in 2007 to 7% in 2008 — and allowed for an increase in social spending of about 1% of GDP to partially offset the rapid increase in the cost of living. The rapid GDP growth, combined with the fiscal surplus, led to a further decline in the public debt-to-GDP ratio to 39% by end-2008, the IMF found. The IMF also noted that the Panama Canal expansion, estimated to cost USD5.3bn, is broadly on track, and the external financing for the project has been secured on very favourable terms. A new Social and Fiscal Responsibility Law (SFRL) — enacted in June 2008 — and a Public-Private Partnership (PPP) draft law that is being finalized, are important reforms that will further strengthen fiscal management over the medium term, in the view of the IMF.

Executive Directors at the IMF noted that Panama is facing the global economic crisis from a position of strength, with sound economic fundamentals helping to contain the adverse impact of the world economic downturn and financial turmoil. In particular, the directors commended the well-regulated banking sector, sustained fiscal consolidation, and Canal expansion project, which will allow Panama to preserve macroeconomic stability and continue growing during 2009, albeit at a slower pace than in recent years.

After commending them on several aspects of government policy, and achievements in maintaining growth and fiscal balance, the IMF directors observed that the inclusion of Panama in a list of tax havens released by the OECD presented additional challenges. In their report they welcomed the authorities’ intention to respond constructively, and called upon them to reach agreement on the steps needed to normalize its status.

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