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Statement by an IMF Article IV Mission to Panama

An International Monetary Fund (IMF) mission, headed by Corinne Deléchat, visited Panama between November 7–18 to conduct the country’s annual Article IV consultation.1 At the end of discussions, Ms. Deléchat issued the following statement in Panama City:

“Panama is now among the fastest-growing countries in the Western Hemisphere. Many years of strong real Gross Domestic Product (GDP) growth accompanied by successful fiscal consolidation have resulted in a rapid decline in debt ratios and in upgrades of its sovereign debt credit rating. Its financial sector showed resilience during the 2008–09 global crisis, and stress tests conducted in the context of a recent Financial Sector Assessment Program (FSAP) mission confirmed that that the banking system can be expected to remain sufficiently capitalized even under challenging external conditions.

“Near-term prospects are favorable, although global risks associated with economic activity and financial stability are on the rise. The Panama Canal expansion and the government’s investment program are expected to continue to drive demand and growth over the coming years, mitigating the impact of the weak global outlook. Real GDP growth is expected to exceed 8.5 percent in 2011, owing to continued strong performance in the construction, commerce and transportation sectors, and to slow somewhat in 2012. Inflation would remain relatively high, and amounted to 5.2 percent as of end-October 2011 (cumulative basis), but is projected to gradually decline going forward as world commodity pressures continue to ease.

“Against this background, near-term policies should remain prudent and focus on building buffers and strengthening crisis-prevention tools. The mission welcomes the authorities’ commitment to maintaining the deficit below the ceiling allowed under the Social and Fiscal Responsibility Law (SFRL). In the context of a tight labor market and above-average inflation, further fiscal stimulus should be avoided.

“Discussions on medium-term policies focused on measures to strengthen the fiscal framework, enhance financial sector supervision, and remove growth bottlenecks. In the fiscal area, implementation of the government’s investment program within the limits of the SFRL calls for continuing enhancements in the quality and effectiveness of spending and strengthening tax administration. The mission welcomes the government’s plans to better target subsidies and improve the equity of the tax system. The mission also commends the authorities’ plan to establish a Sovereign Wealth Fund to save part of the additional revenue from the expanded Panama Canal.

“Reaping the benefits of full dollarization and political stability, Panama has established itself as an important regional hub for banking services, but now faces challenges going forward, as banks gradually move toward a more sophisticated business model and capital markets continue to develop. In the near term, the supervisory authorities’ capacity to monitor and identify overall financial system risks should be upgraded. In addition, building on recent initiatives to move to risk-based supervision, the regulatory framework should be further strengthened, in line with best international practices.

“A key medium-term challenge for the Panamanian economy is to remove obstacles to sustained and inclusive growth. Once the Canal expansion and the public investment program taper off, growth will have to be driven by productivity increases. In this regard, ongoing efforts to improve the quality of education and to remove skill mismatches through vocational and on-the-job training should continue. Investments in human capital will ensure that all Panamanians can benefit from increased economic opportunities.”

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. 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.

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