The International Monetary Fund (IMF) expects growth to rebound in Panama this year, as economic activity is projected to recover after a slowdown in 2018-19.
In its latest Article IV Consultation with Panama, the IMF reports that the projected growth for this year is supported by full-scale copper production and robust private investment. The IMF identifies as the key risks to the growth potential a setback in exiting the Financial Action Task Force (FATF) grey list, a slowdown in the Panama Canal traffic amid escalating trade tensions, weak growth in key trade partner countries, and the coronavirus outbreak.
The IMF notes that “while external imbalances are expected to decline over the medium-term, the external position is moderately weaker than fundamentals and desirable policy settings.” It says sustained fiscal discipline is required for fiscal policy credibility and to keep public debt on a downward trajectory.
“On the expenditure side, realigning current spending with social needs…will be crucial to achieve sustainable and inclusive growth.”– The International Monetary Fund
Amid a relatively high deficit exacerbated by newly discovered unrecorded arrears has caused Central Administration debt to reach 46.2 percent of Gross Domestic Product in 2019. As such the IMF is advocating for a realignment of fiscal revenue and expenditures, which it says is imperative to sustain growth.
This is In addition to improving the capacity of tax and customs administrations, action is required to review Panama’s complex tax exemptions that continually erode the tax base. “On the expenditure side, realigning current spending with social needs—including by investing more in education—and improving the effectiveness of social spending will be crucial to achieve sustainable and inclusive growth,” the IMF recommends.
As it regards capital projects, it was cited as in need of carefully assessment and prioritisation going forward. The IMF points to the country’s pension system, which needs to be strengthened.
Faced with slowing population growth, the authorities are being encouraged by the IMF to “gradually align pension contributions with expected payouts, to avoid creating an undue burden to the public finances in the long run. Given the politically sensitive nature of such adjustments, a slow-paced approach is recommended.”
The IMF assessment identified a strengthening the fiscal framework, which it identified as essential to improving the macroeconomic policy tool-kit. The emergence of sizable unrecorded arrears, the IMF observes “highlights the need to strengthen budgetary execution rules and misuse penalties as well as to streamline the recording of fiscal accounts by limiting the use of turnkey projects and deferred payment contracts in public investment projects.”
Exiting the FATF grey list must remain a priority, the IMF emphasises, adding that building on the momentum of recent legislative action, the Panamanian authorities should continue addressing the deficiencies in Panama’s AML/CFT regime and legal framework identified by the FATF.
In addition, the authorities should address the shortcomings identified in the 2019 Global Forum review on global tax transparency, including by responding to exchange-of-information requests in a timely manner.