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Future Bright For Panama: IMF

by Mike Godfrey,, Washington

13 April 2012

The International Monetary Fund has published its Article IV report in respect of Panama, noting that the country has exited the global downturn robustly, with a well-capitalised banking system, but efforts should continue to build upon the tax revenue base to reverse poor revenue performance witnessed last year.

The Fund has reported that Panama has rebounded strongly from the 2009 slowdown. Public debt has fallen as a result of rapid growth and prudent fiscal policy. However, last year capital expenditures and a lower-than-anticipated tax-take meant the nation's deficit expanded in 2011-12, to 3.5% of Gross Domestic Product (GDP) against a target of 2%.

The IMF said authorities' neutral fiscal stance for 2012-13 is broadly appropriate, but encouraged the introduction of measures to improve tax compliance. Authorities project that tax revenues will rise by 1.4% during 2013, supported by tax reforms enacted in 2009-10.

The IMF has noted that stronger revenue collection measures would create additional fiscal space, opening up the possibility of increasing spending on social programs and infrastructure. The IMF suggested that the country tackle tax evasion, expected to amount to 5% of revenues in 2011, by establishing a Large Taxpayer Unit and strengthening other fiscal controls. In response, Panamanian authorities noted that the introduction of fiscal cash registers in most retailers would help tackle tax avoidance and fraud.

On the banking sector, the IMF said that the recent Financial Sector Assessment Program mission confirmed strength and resilience in the banking sector, with high levels of liquidity. The IMF reinforced that maintaining strong Anti-Money Laundering and Countering the Financing of Terrorism (AML/CTF) safeguards is essential to supporting the further development of Panama's financial services sector, and welcomed the authorities' commitment to completing the AML/CTF assessment as part of the FSAP process by the end of 2012.

Financial sector oversight should be brought in line with best international practices, and all non-bank segments should be upgraded, in line with FSAP recommendations, the IMF said. "Although banking supervision is strong and effective overall, risk-based and consolidated supervision should be further enhanced. [In addition] potential reputational risks highlight the need to continue with efforts to strengthen oversight of non-bank financial institutions. Ongoing initiatives to develop capital markets, notably through the market-makers initiative, are welcome,” the IMF report says.

Concluding, the IMF said Panama has strong prospects for the future, noting in particular that survey-based competitiveness indicators and rankings had shown that, overall, Panama's competitiveness has been improving in recent years, and compares well with the largest economies in the region. Those surveys highlight political stability, infrastructure, and financial development as Panama’s strengths. Panama also maintains one of the lowest tax-to-GDP ratios in the region.

Lastly, the IMF noted that the recently-approved Free Trade Agreement with the United States is expected to boost further Panama’s status as a regional logistics hub. To continue to attract investment and promote employment, Panama will need to further improve the business environment and the labor market, the IMF concluded.

TAGS: environment | compliance | tax | investment | business | tax compliance | tax avoidance | fiscal policy | banking | financial services | capital markets | United States | tax reform | retail | Panama | services

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