Null 002.2020.issue 125 en

IMF Country Report No.
20/125
PANAMA
SELECTED ISSUES
April 2020
This paper on Panama was prepared by a staff team of the International Monetary Fund
as background documentation for the periodic consultation with the member country. It
is based on the information available at the time it was completed on March 9, 2020.
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PANAMA
SELECTED ISSUES
March 9, 2020
Approved By Prepared By Paola Aliperti F. Domingues, Olga Bespalova,

Western Hemisphere Julian Chow, Julia Faltermeier, and Marina Rousset (all
Department WHD)
CONTENTS
FISCAL POLICY IN PANAMA: BACKGROUND, CHALLENGES AND POLICY OPTIONS_ 5
A. Background ____________________________________________________________________________ 5
B. Revenue Measures _____________________________________________________________________ 7
C. Expenditure Measures ________________________________________________________________ 10
D. Strengthening of the Fiscal Framework _______________________________________________ 12
E. Concluding Remarks __________________________________________________________________ 14
FIGURES
1. Higher Deficit Increased Public Debt ___________________________________________________ 5
2. Composition of Tax Revenue and Expenditure _________________________________________ 7
3. Efficiency of Education Spending is Low Compared to the Region ____________________ 11
TABLES
1. Tax Expenditure ________________________________________________________________________ 8
2. Central Government Fiscal Operations, 2015–19 ______________________________________ 16
3. Non-financial Public Sector Fiscal Operations, 2015–19 _______________________________ 17
References _______________________________________________________________________________ 18
AML/CFT ISSUES IN PANAMA: BACKGROUND AND POLICIES ______________________ 19

A. Background ___________________________________________________________________________ 19
B. Recent Developments _________________________________________________________________ 20
C. Policy Priorities________________________________________________________________________ 23
D. Conclusions ___________________________________________________________________________ 25

PANAMA
FIGURE
1. Reporting of Suspicious Activity and FATF Compliance _______________________________ 21
References _______________________________________________________________________________ 26
TOWARDS A MORE RESILIENT FINANCIAL SECTOR __________________________________27

A. Overview of the Financial System and Recent Trends _________________________________ 27
B. Improve Financial Stability Oversight and Prudential Framework _____________________ 29
C. Develop Financial Sector Safety Nets and Improve Bank Resolution __________________ 36
D. Enhance Regulatory Framework and Coordination ___________________________________ 38
E. Conclusions: Key Recommendations __________________________________________________ 41
FIGURE
1. Monitoring of the Housing Prices and Construction Activity __________________________ 31
TABLES
1. Capital Adequacy Ratios in Percent of Risk-Weighted Assets (RWA) __________________ 32
2. Implementation of the Main Elements of the Basel III Package in Panama ____________ 33
ANNEX
1. Recent Developments _________________________________________________________________ 42
References _______________________________________________________________________________ 44
MACROPRUDENTIAL POLICY IN PANAMA: IMPLICATIONS FOR THE REAL ESTATE

MARKET ________________________________________________________________________________46
A. Introduction __________________________________________________________________________ 46
B. How Have Property Prices, Mortgage Lending, and Household Debt Evolved
Recently? ________________________________________________________________________________ 47
C. Are Residential Real Estate Prices Showing Signs of "Overheating"? __________________ 49
D. Have There Been Changes in Bank Mortgage Lending Policies? _______________________ 51
E. What Are the Macroprudential Measures to Mitigate Housing Risks? _________________ 53
F. Conclusion and Policy Implications ____________________________________________________ 57
BOXES
1. Sectoral Capital Requirements with Effect from July 1, 2016 __________________________ 53
2. Macroprudential Instruments to Mitigate Risks in the Household Sector and
Indicators to Identify When to Tighten __________________________________________________ 54
2 INTERNATIONAL MONETARY FUND

PANAMA
FIGURES
1. Household Mortgage Debt Indicators_________________________________________________ 47
2. Real Estate Indicators _________________________________________________________________ 48
3. Economic Growth and Commercial Banks’ Lending Rates _____________________________ 50
4. Contribution of Explanatory Variables and Commercial Banks’s Mortgage
Lending Rates_____________________________________________________________________________ 52
5. Limits on LTV and DSTI Ratios and Number of Countries at Each Range, 2014 ________ 55
6. Transmission Mechanism of Three Sectoral Macroprudential Instruments ____________ 56
ANNEXES
I. When Do Real Estate Prices Depart from "Fundamentals"? ____________________________ 59
II. Model: Residential Real Estate Price-to-Income _______________________________________ 60
III. Model: Growth in Residential Mortgage Lending _____________________________________ 63
References _______________________________________________________________________________ 65
STRUCTURAL POLICIES IN PANAMA: BACKGROUND AND POLICY

RECOMMENDATIONS __________________________________________________________________66
A. Drivers of Growth: High Investment, but Slowing Productivity ________________________ 66
B. Growing Capital with a Favorable Business Environment ______________________________ 68
C. Increasing Human Capital and the Availability of Skilled Labor _______________________ 71
D. Boost Productivity with Higher Innovative Capacity___________________________________ 72
E. Upgrading Infrastructure ______________________________________________________________ 72
F. Concluding Remarks __________________________________________________________________ 76
FIGURES
1. Growth Accounting ___________________________________________________________________ 66
2. Labor Allocation Across Sectors _______________________________________________________ 67
3. Competitiveness Indicators Show Some Room for Improvement _____________________ 68
4. Global Competitiveness Index _________________________________________________________ 69
References _______________________________________________________________________________ 77
SOCIAL ISSUES IN PANAMA: BACKGROUND AND POLICIES_________________________78

A. Background ___________________________________________________________________________ 78
B. Policy Priorities ________________________________________________________________________ 79
C. Poverty in the Comarcas ______________________________________________________________ 81
D. Social Support Programs _____________________________________________________________ 82
E. Gender Equality _______________________________________________________________________ 82
F. Climate Change _______________________________________________________________________ 84
G. Conclusions ___________________________________________________________________________ 86
INTERNATIONAL MONETARY FUND 3

PANAMA
BOX
1. President Cortizo’s Commitments to Advance Social Policies _________________________ 79
FIGURES
1. A High-Income Economy that Lags Regional Peers in Human Development __________ 78
2. Education Spending and Outcomes in Panama are Low Compared to Peers __________ 80
3. Poverty Reduction in Indigenous Territories Is Well Behind the Rest of the Country __ 81
4. Economic and Social Opportunities for Women are Limited Compared to Peers ______ 83
5. Fresh Water Is Becoming Scarce Despite Generous Endowment ______________________ 86
References _______________________________________________________________________________ 87

PANAMA
FISCAL POLICY IN PANAMA: BACKGROUND,

CHALLENGES AND POLICY OPTIONS1
A. Background
1. Fiscal policy remains the main instrument for economic management in Panama. As a
fully dollarized economy with an open capital account, no central bank, no independent monetary
policy and little use of macroprudential tools, fiscal policy is de facto the only macroeconomic
stabilization tool available. At the same time, fiscal policy is restricted by a fiscal rule, the Social
Fiscal Responsibility Law (SFRL), anchored at an indicative target of net debt to GDP ratio of 40
percent which is operationalized through a limit on the deficit of the non-financial public sector
(NFPS). While the rule introduced in 2009 has supported fiscal discipline and reduced debt, it can be
prone to unintended pro-cyclicality of fiscal policy.
2. The 2019 shortfall in fiscal revenue poses challenges to a government which collects
already little revenue relative to other emerging economies. Tax revenue amounted to
9½ percent of GDP on average between 2014 and 2018, significantly lower than the average for
Central America and Latin America peers, at 15 percent and 17½ percent, respectively. In 2019, tax
revenue plummeted to 8.2 percent of GDP following the economic slowdown, but also for structural
reasons as some of the most dynamic sectors face lower tax burdens. Although non–tax revenue
makes up for some of the low tax efforts (Table 3), it also declined. Only the canal contributions (toll
fees and dividends) continued to grow, reaching 2.6 percent of GDP, and this is due to the
expansion of the Panama Canal in 2016.
Figure 1. Panama: Higher Deficit Increased Public Debt

Fiscal Impulse 1/ Public Debt
(In percent of GDP) (In percent of GDP)
2.0 70
Fiscal impulse Output gap External
1.5 60
Internal
50 Public debt (NFPS)
1.0
40
0.5
30
0.0
20
-0.5 10
-1.0 0
2012 2013 2014 2015 2016 2017 2018 2019 2005 2007 2009 2011 2013 2015 2017 2019
Source: National authorities, IMF staff calculations.

1/Fiscal impulse is calculated as the change in the cyclically-adjusted primary balance of the NFPS; positive means fiscal loosening.
1
Prepared by Julia Faltermeier (WHD).

PANAMA
3. Despite the unexpected deterioration of the fiscal position in 2019, the authorities
stabilized the deficit at 3.1 percent of GDP
in 2019. To avoid an abrupt tightening, the Comparison of Tax Rates 1/
authorities amended the SFRL in October CIT PIT VAT
2019 establishing new ceilings for the deficit Central America 30 30 13
of the NFPS. 2 Although the revision would Latin America 25 33 16
have permitted a deficit of up to 3.5 percent OECD 24 40 19
of GDP, the authorities managed to stay Panama 25 25 7
below the ceiling. The law foresees a gradual Singapore 17 20 7
tightening starting from a deficit of 2.75 Hong Kong 17 15 0
percent of GDP in 2020, 2.5 percent in 2021 Source: Global KPMG Tax Rates Database (GKTR)
1/ Average for CA, LAC and OECD comparators; latest available (mostly 2015).
and 2.0 percent from 2022 onwards.
4. The fiscal framework has been key to entrenching fiscal discipline and maintaining
debt sustainability. The overall deficit of the non-financial public sector (NPFS) averaged
2½ percent of GDP during the last 5 years. At times, the rule led the authorities to prioritize fiscal
prudence over economic stabilization, leading to unintended pro–cyclicality of fiscal policy. For
example, the fiscal stance in 2019 ended broadly neutral despite a significant negative output gap
and the modification of the deficit ceiling. But fiscal prudence has also helped to keep debt levels at
historical lows. Since the introduction of the rule in 2009 until 2018, gross debt of the NFPS
remained well below 40 percent of GDP. To prevent losing the fiscal track record built over the last
decade in light of the frequent revisions to the rule and the latest increase of gross debt to 40.8
percent of GDP in 2019, the fiscal framework needs to be strengthened further.
5. Despite recent fiscal deficits, Panama continues to enjoy access to international

capitals markets at record-low spreads. Since attaining investment grade status in 2010, Panama
has tapped international capital markets at relatively low costs. Sovereign spreads (EMBIG of
114 basis points in December 2019) are among the lowest in Latin America, supported by strong
economic fundamentals and the solid fiscal framework. In April 2019, the authorities issued
US$1.0 billion Treasury Notes under Panamanian law linked to Euroclear giving access to
international buyers which achieved a spread of 140 basis points at a 7-year maturity. Most recently
(end-November 2019), the authorities issued US$1.3 billion in Global Bonds at historically low rates,
a 2030 bond and a 2053 bond at spreads of only 105 and 135 basis points relative to the respective
U.S. instruments. However, a revision to negative outlook in February 2020 by Fitch Ratings citing
downside risks amid rising public debt highlights the importance of fiscal prudence.
2 The previous administration modified and simplified the SFRL in October 2018, simplified the rule and set the NFPS
deficit at 2 percent of GDP in 2018-19, 1¾ percent in 2020-21, and 1½ percent of GDP after 2021, with the target
over the medium-term broadly in line with the limit under the previous law. Congress also approved an adjustment
of the accrual rules for the accumulation of savings into Panama’s Sovereign Wealth Fund (FAP), specifically to saving
half of the excess Canal contribution (over the threshold of 2½ percent of GDP) to the budget.

PANAMA
Figure 2. Panama: Composition of Tax Revenue and Expenditure

Expenditure 1/ Revenue 2/
(In percent of GDP) (In percent of GDP)
30 Current primary spending Accrued spending 20
Direct tax revenue Indirect tax revenue
25 Capital spending Interest Non-tax revenue Canal transfers
16
20
12
15
8
10
4
5
0 0
2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019
Sources: National Authorities and IMF staff calculations.
1/ Covers the Non-financial Public Sector following the national definition, accrued spending is staff’s adjustment to account for accrual of
previously unrecorded expenditure.
2/ Data refer to the Central Government.
B. Revenue Measures
6. Low tax revenue limits space for financing development. Panama reached high-income
status in 2018 (according to the World Bank) but economic development also requires that other
socio-economic indicators improve. Public finances play a central role in ensuring the availability of
sufficient financial flows to invest in continued development – such as infrastructure, health and
education - and to foster social inclusion. To permit the state to provide public services appropriate
for Panama’s income level, revenue levels will have to increase. As levels of non-tax revenue, mainly
from the canal, grow at a slower rate than national GDP, the bulk of the additional revenue will need
to come from taxes. 3
7. Low tax revenue reflects weaknesses in tax policy and administration. The tax system
plays an important role in determining the relative attractiveness of Panama for investors. The
authorities want to explore tax and customs administration as a first avenue to increase tax revenue
due to serious structural weaknesses in this area. Main areas of concern include governance, internal
controls (and vulnerabilities to corruption), IT infrastructure, information and risk management,
auditing capacity, and the tax compliance program. Some measures, like the electronic invoicing,
which is currently being tested in a pilot, are promising, but wider reforms will be needed. These
could include a strengthening of the management of large taxpayers, improving customs controls
and enforcing tax arrears collection instead of relying on frequent tax amnesties.
8. Tax policy reform should be considered at some point. If the cyclical recovery together
with tax administration reform does not yield sufficient revenue, a comprehensive reform of the tax
system should be an option. The last reform was done in 2009–14. A previous IMF study found that
the efforts improved the progressivity of the tax system, but nonetheless fell short of their
3
The Canal transfers to the central government are expected to decline as a percent of GDP as the Panamanian
economy is projected to grow at a faster rate than world trade.

PANAMA
objectives. 4 Future reforms should rely on a mix of curbed tax exemptions (especially VAT, CIT),
increased compliance with tax obligations (especially for VAT, CIT, PIT) and possibly some increases
in tax rates (including VAT and environmental taxes).
Table 1. Panama: Tax Expenditure

Tax Expenditure as a share of GDP
Income taxes Tax expenditure
Country Year Total VAT
CIT PIT C+P Others % of tax revenue
Bolivia 2015 1.5 1.2 0.1 0.0 0.1 0.2 6.9
Argentina 2019 2.3 1.2 0.3 0.1 0.4 0.7 10.2
Peru 2017 2.2 1.7 0.2 0.1 0.3 0.2 15.6
Paraguay 2014 1.9 1.4 0.2 0.1 0.4 0.2 14.8
El Salvador 2014 2.8 1.6 … … 1.2 0.0 17.4
Brazil 2016 4.2 0.4 0.7 0.2 0.9 2.9 17.6
Mexico 2017 3.2 1.4 0.5 1.0 1.5 0.3 21.3
Guatemala 2016 2.3 1.4 … … 0.0 0.9 21.7
Chile 2016 4.2 0.6 … … 3.5 0.0 22.2
Uruguay 2017 6.3 3.0 1.4 0.5 1.9 1.4 33.2
Honduras 2016 6.2 3.3 2.0 0.4 2.4 0.5 33.5
Panama 2016 3.6 2.3 1.3 … 1.3 0.0 34.3
Costa Rica 2016 5.3 2.9 … … 0.0 2.5 33.6
Ecuador 2017 4.7 2.3 1.3 0.7 2.0 0.4 34.5
Nicaragua 2014 5.6 4.5 0.8 … 0.8 0.3 32.9
Dominican Rep. 2017 6.4 3.0 0.7 0.1 0.8 2.6 46.7
Average 3.9 2.0 0.8 0.3 1.1 0.8 24.8
Source: Country tax administrations and Ministries of Finance.
9. Tax expenditure is relatively high compared to the region. In 2016, tax expenditure
accounted for around 3.6 percent of GDP or about ⅓ of total tax revenue collection. The share of
revenue is above the regional average of ¼. VAT accounted for most of the tax expenditure.
Reviewing and streamlining the system of tax exemptions will help tax administration by simplifying
collection, curb tax expenditures that are inadequately targeted and help to reverse the downward
trend in revenue even without raising tax rates.
10. Revenue from VAT is one of the lowest in Latin America and the Caribbean (LAC).
Panama raised on average 2.5 percent of GDP through VAT receipts in the past five years while the
averages for LAC and OECD economies are 6.3 and 6.7 percent of GDP respectively. The low revenue
stems from a combination of low rates, many exemptions and evasion. The OECD estimates that
Panama only collects 62 percent of the VAT’s potential revenue. 5 Staff estimates that measures to
limit VAT tax expenditure and the inclusion of services provided from abroad in the tax base could
increase revenue by about ½ percent of GDP.
4
Vtyurina (2013), “Panama: Taking Stock of a Decade of Tax Reforms”, IMF, Selected Issues Paper 2013,
5 Potential VAT revenue is estimated by applying the generalized VAT tax rate on final consumption.

PANAMA
11. Corporate tax rates are on par with LAC and advanced economy counterparts but are
among the lowest in Central America. The tax system is based on a territorial principle, rates are
relatively low, and exemptions and incentives are widespread (granted under a variety of schemes).
Compared to Singapore with a similar business model, however, CIT tax rates in Panama are higher.
Nevertheless, Singapore reached tax revenues of 14.1 percent of GDP in 2017, well above Panama’s
9.4 percent of GDP. A cost-benefit analysis can reveal if tax incentives achieve the desired outcomes.
Moreover, regular checks need to ensure that firms comply with the conditions of exemptions.
12. Reviewing environmental tax rates can yield additional revenue while helping Panama
to reach its climate commitments. For example, the selling price of gasoline and diesel in Panama
is lower than the region. A gradual increase in taxes on the consumption of petrol would give
households and firms time to adapt and incentivize the investment in energy-efficient machinery
and vehicles. Moreover, environmental taxes should be combined with social spending that limits
the negative impact on the consumption of petrol for poorer households.
Policy Options
• Upgrade governance, institutional capacity and human capital of the tax and customs
administration to increase revenue collection
• Strengthen compliance with tax obligations
• Re-establish a Large Taxpayer Unit to better manage large taxpayers
• Improve provision of public services, transparency and accountability to strengthen citizens’

willingness to pay taxes.
• Undertake a cost-benefit analysis of tax exemptions and incentives.
• Review tax rates, especially for VAT and environmental taxes.
13. The fiscal contribution of the new copper mine will be small. The government granted
the concessions to Minera Panama through a special legislation, Law No. 9 of 1997, which was
declared unconstitutional by the supreme court in late 2018. The uncertainty relating to the legality
of the large copper mine’s contract is still unresolved, but production has started as planned in mid-
2019. However, given that copper production will become a significant contributor to the economy,
it will be important to eliminate the uncertainty by reaching an agreement on this issue. 6 A survey
documented in Mitchell (2009) suggests that tax considerations are key to attracting and retaining
6 Under the special contract with the government, Minera Panama must pay 2 percent royalty on the “Negotiable
Gross Production”, defined as the gross amount received from the sale (of concentrates) after deduction of all
smelting costs, penalties, transportation costs, insurances and other costs incurred in their transfer from the mine to
the smelter. Also applied are a land rental tax of US$3.00 per hectare per year for the total concession area (less than
US$41 thousand a year), and a corporate income tax of 25 percent on taxable earnings, with exemption for the
period during which the Company has outstanding debt relating to the construction and development of the project
(see NI 43-101 Technical Report 2019).

PANAMA
investors. At the same time, tax rates in Selected Mineral Taxation Features of Leading Copper Producers
Panama are low by international standards. CIT (%) Royalty (%) Special allowances/contracts
An estimate based on the IMF’s framework US 35-47 various Yes
for Fiscal Analysis of Resource Industries Brazil 34 2 Yes

DRC 30-40 2 Yes
(FARI) suggests that the Average Effective Australia 30 2.5-5 Yes
Tax Rate (AETR) is 26 percent and falls to Mexico 30 7.5 Yes
2 percent once tax credits and tax holidays Peru 28 various Yes
South Africa 28 0.5-7 No
are considered. 7 With this, Panama’s fiscal
China 25 various Yes
regime for copper mining is relatively Indonesia 25 4 Yes
generous among other copper-producing Panama 25 2 Yes
Chile 24 5-14 No
countries.
Russia 15.5-20 8 No
Source: PWC "Compare mining taxes data tool".
Policy Options
• Take action to remove the uncertainty created by the nullified Law No. 9.
• Develop technical and administrative capacity to understand the complexity of the mining sector
and be able to supervise, monitor and tax the sector.
C. Expenditure Measures
14. Despite fiscal consolidation, the government needs to maintain resources for public
investment and social spending. In 2018, current primary spending (driven by wages and transfers
and subsidies), accounted for 66 percent of total expenditure of the central government, up
10 percentage points from 5 years ago, as the share of capital spending went down to 34 from
44 percent, due to the deceleration of public infrastructure projects. 8 Roughly 2/3 of the higher
wage bill is explained by higher public sector wages, including the increase in teacher salaries
agreed in 2014. 9 The share of interest expense has been roughly stable. As low levels of revenue
combined with the deficit ceiling limit expenditure growth, expenditure should be rebalanced to
give sufficient space in the budget for public investment and social spending.
15. Strengthening the public financial management system can help to reduce current
expenditure. The uncovering of unrecorded arrears linked to unrecorded spending as well as delays
in the payment of subsidies highlight the need to improve budget and expenditure controls.
Moreover, timely payments to suppliers can reduce procurement costs.
7 The Average Effective Tax Rate (AETR) or “government take” is defined as the ratio of cumulative government
revenue to the project’s pre-tax net cumulative cash flows.
8
Capital expenditure by the central government does not include investments of the Panama Canal Authority for the
canal expansion in 2016.
9
The agreement foresaw an increase in monthly teachers’ salaries by US$900 in three rounds. The first two increases
doubled teacher salaries in six years. The third increase of US$300 was announced in December 2019 and will be
applied in 2020. With a median monthly salary of around US$1,200, schoolteacher is one of the highest paid
occupations in 2019, well above the median salary of US$700.

PANAMA
Figure 3. Panama: Efficiency of Education Spending is Low Compared to the Region

Teachers and Outcome, Primary 1/
Teachers and Outcome, Secondary 1/
(Latest value available)
110 (Latest value available)
Net Enrollment - Secondary ( in percent)

Net Enrollment - Primary (in percent)
105
100 100
95
80
90
85 60
80 LAC Panama LAC Panama
75 40
70
EMEs OECD 20 EMEs OECD
65
60 0
0 5 10 15 0 5 10 15
Teacher student ratio, primary, per 100 students Teacher student ratio, secondary, per 100 students
Sources: IMF Expenditure Assessment Tool (EAT)

1/ Dash lines are the average of LAC. Latest available data for Panama corresponds to 2017
16. The effectiveness of social and

Composition of Central Government Spending
investment spending needs to be
100%
improved. Even without significant 90%
80%
increases in spending, greater 70%
effectiveness can improve outcomes. To 60%
50%
achieve this, project selection for 40%
30%
investment spending and effective 20%
execution need to be strengthened. 10%
0%
Social spending is often not sufficiently 2004 2007 2010 2013 2016 2019
targeted at the most vulnerable Wages and salaries Pensions and transfers Goods and services
Interest payments Capital
population. For example, in 2019 the
Sources: National Authorities and IMF staff calculations.
government spent around US$218
million (0.3 percent of GDP) on the electricity subsidy introduced in 2009 to prevent price increases
for 99 percent of consumers instead of targeting the measures to more vulnerable members of
society.
17. A new law for private-public partnerships (PPP) was introduced in 2019. The new
administration hopes to leverage additional financing for public infrastructure projects from the
private sector. While some ideas have been collected, no concrete projects have been discussed so
far. PPPs can be useful to access private sector expertise and efficiency, but they also come with
risks. The selection process needs to be transparent, with clear rules on the accounting for risks as
well as the monitoring of the execution of the projects.

PANAMA
Energy Subsidies by Product 1/

(In percent of GDP, latest value available)
16
14 Petroleum Coal Natural Gas
12 Electricity Latin America EMEs
10 OECD
8
6
4
2
0
Mexico
Suriname
Belize
El Salvador
Argentina
Brazil
Colombia
Chile
Uruguay
Venezuela
Aruba
Guyana
Panama
Guatemala
Bolivia
Costa Rica
Peru
Paraguay
Honduras
Ecuador
Nicaragua
Sources: IMF FAD Expenditure Assessment Tool (EAT), IMF Energy Subsidy estimates.
1/ Daslines are the median for countries in the region. Latest available for Panama corresponds to 2017.
Policy Options
• Undertake an expenditure review (e.g. PIMA for infrastructure governance).
• Strengthen budget and expenditure control.
• Provide rationale for transfers and subsidies and ensure adequate targeting and effectiveness
• Slow down wage growth to create room for social spending and strengthen link between pay
and productivity.
D. Strengthening of the Fiscal Framework
18. The accumulation of fiscal buffers Fiscal Buffers

(In percent of potential GDP)
could help to reduce unintended pro- 0
cyclicality of the fiscal policy under the -0.2
SFRL. Over the medium term, as the debt to -0.4

-0.6
GDP ratio falls and taking advantage of the -0.8
expected sustained period of low global -1
interest rates, this will gradually lower the -1.2

Fiscal buffer
average interest rate of the public debt -1.4
-1.6 Primary balance with buffer
portfolio, interest payments as a percent of
-1.8
Cyclically-adjusted primary balance
GDP are expected to decrease. Instead of -2
widening the primary balance, the 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
government could save this additional space

Sources: IMF staff calculations
as fiscal buffers under a self-imposed “shadow fiscal rule”. This space could be used for fiscal
stimulus in cyclical downturns while always keeping the deficit within the ceiling. In practice, this
would mean a fiscal policy that maintains the

PANAMA
primary balance of the NFPS at -0.15 percent of GDP after 2022. By 2025, under the baseline
scenario the fiscal buffer could reach a ¼ percent of GDP and will continue to grow. However, since
the shadow fiscal rule would not override the SFRL, its successful implementation requires political
commitment and effective communication of the rule to the public.
19. Early appointment of the members of the fiscal council can enhance transparency and
credibility of fiscal policy. The recent amendments to simplify the fiscal framework and make it
more transparent and the approval of the law creating an independent Fiscal Council (FC) are
encouraging. The FC will comprise three independent professionals, with experience in public
finance, or macroeconomics. Members will be appointed by the government on a 7–year term.
Supported by a technical secretariat in the Ministry of Economy and Finance, the FC will evaluate
macro-fiscal policy, and issue a non-binding opinion, according to the areas of its mandate. 10 Its
assessment should include fiscal plans and performance, the evaluation of macroeconomic and
budgetary forecasts and the FC should ensure that the medium-term fiscal framework facilitates
compliance with the SFRL. The FC is expected to promote public awareness and stimulate debate on
macro-fiscal issues. Moreover, as part of its assessment, the FC could estimate the cyclically adjusted
deficit to facilitate decision-making on the accumulation or use of fiscal buffers.
Policy Options
• Appoint the members of the Fiscal Council and provide adequate resources.
• Avoid further changes to the SFRL to protect the credibility of the fiscal framework.
• Fortify the accountability framework and enforcement mechanisms for the SFRL.
• Reduce fiscal policy pro–cyclicality, for example by accumulating buffers under a shadow fiscal
rule.
20. Fiscal reporting and transparency continue to be hampered by the use of turnkey
projects and the limited coverage of the national NFPS definition. While there is room to
improve the quality and timeliness of fiscal accounts, the use of turnkey contracts, which is unusual
given Panama’s income and also in comparison with the rest of the region, complicates fiscal
statistical reporting. Under this model, contractors are responsible for obtaining project financing
and expenditures are recognized in the fiscal accounts only when payment is made upon
completion of work. In effect, it permits the separation of the timing of construction, the recognition
of the corresponding liability, and the recording of expenditure in the public accounts. The deferred
recognition of capital expenditure undermines the transparency of fiscal commitments and accurate
assessment of fiscal policy. Moreover, it is not clear why the model continues to be used given the
government’s ample market access at favorable conditions. Another issue is the institutional
10 If the government does not adopt the FC’s advice it has to issue an explanation for not doing so.

PANAMA
coverage of the non–financial public sector, which is limited in scope 11, and as such assessing the
true fiscal position is a challenge 12. While the public enterprises outside the definition of NFPS have
strong fundamentals and strong credit ratings, the authorities could be assessing the fiscal risks.
Efforts are ongoing by CAPTAC to assist with some of these issues.
Policy Options
• Adopt best practices on accounting methods.

• Review and phase out the use of turnkey contracts.
• Prepare consolidated accounts of the NFPS according to international standards (GFSM 2014).
21. Analysis and management of fiscal risks. Better analysis of fiscal risks to which Panama
is exposed can help ensure a solid fiscal position. Sources of fiscal risks in Panama include
unfunded pension liabilities, turnkey projects, contingent liabilities of public companies, extreme
weather events (El Nino) and the sizable financial sector. An actuarial assessment of the public
pension system suggests that, without parametric reforms, the system is projected to deplete its
reserves by 2035 (See IMF Country Report No. 16/337). 13 A comprehensive assessment of all
contingent liabilities of the consolidated public sector is therefore needed to ensure adequate
support for fiscal policy’s exclusive stabilization role in the absence of monetary and
macroprudential policies.
Policy Options
• Enhance capacity to analyze and mitigate fiscal risks.
• Prepare and regularly publish a fiscal risks report.
• Reforms the public pension system.
E. Concluding Remarks
22. Panama stands at a crossroad between taking the leap to become an advanced
economy or getting stuck in the middle-income trap. While Panama crossed the World Bank’s
high-income threshold in terms of GDP in 2018 following its exceptional growth in the last decades,
socio-economic indicators that set apart advanced economies have not kept up with the economic
11 According to national definition, three public enterprises are not part of the NFPS. They include the Tocumen
International Airport, ETESA (an electricity distribution company), and ENA (the National Highway company). The
accounts of the Panama Canal are also not consolidated with the government accounts.
12The authorities are mandated by law to report deferred payment schemes (e.g. turnkey projects) in the budget,
which has been a challenge in practice.
13This estimate treats the reserves of the two publicly managed defined benefit subsystems in a consolidated
manner. The old system (System Exclusivamente Beneficio Definido) has dwindling contributions. Its reserves are
estimated to deplete by 2027 and subsequently start generating fiscal pressures.

PANAMA
pace. Fiscal policy is at the heart of the needed improvement in the delivery of public services and
investment. Overcoming the challenges posed by low revenue and demands for higher standards of
public services in an environment of slowing growth will be crucial in determining Panama’s path in
the next decade.
23. The beginning of a new administration provides a window of opportunity to initiate

and implement ambitious reforms. This note takes stock of fiscal issues in Panama and proposes
policy options. The new administration’s fiscal agenda should feature a comprehensive reform of tax
and customs administrations, a review of tax incentives and exemptions and consider steps towards
a broader tax policy reform. A review of the existing framework for mineral taxation should be done
to ensure adequate tax revenue in future projects, while encouraging investment and maintaining
international competitiveness. Important progress in administration reform will be critical to creating
fiscal space to finance productive investment and social spending. Efforts to further strengthen the
fiscal framework with the appointment of the members of the Fiscal Council should continue going
forward. Panama should adopt best practice fiscal accounting and reporting methods. A
comprehensive assessment and management of fiscal risks is necessary to create buffers and
safeguard public finances given fiscal policy’s exclusive stabilization role.

PANAMA
Table 2. Panama: Central Government Fiscal Operations, 2015–19

(In percent of GDP)
Est.
2015 2016 2017 2018 2019
Revenues and grants 13.4 13.3 13.9 13.8 12.5
Current revenue 13.2 13.3 13.9 13.8 12.5
Taxes 9.3 9.7 9.2 9.2 8.2
Direct taxes 4.8 5.1 4.9 5.1 4.4
Income tax 4.3 4.6 4.4 4.6 4.0
Tax on wealth 0.5 0.5 0.5 0.5 0.4
Indirect taxes 4.5 4.6 4.3 4.1 3.8
Import tax 0.7 0.6 0.6 0.5 0.5
ITBMS 2.4 2.6 2.5 2.3 2.2
Petroleum products 0.4 0.5 0.4 0.4 0.4
Other tax on domestic transactions 0.9 0.9 0.8 0.8 0.8
Nontax revenue 3.9 3.6 4.7 4.6 4.3
Dividends 1.6 1.5 2.3 2.3 2.2
Of which : Panama Canal Authority 1.1 1.2 1.9 1.8 1.8
Panama Canal Authority: fees per ton 1/ 0.7 0.7 0.7 0.8 0.8
Transfers from decentralized agencies 0.5 0.5 0.5 0.5 0.4
Other 1.1 0.9 1.2 1.0 0.9
Capital revenue 0.1 0.1 0.1 0.0 0.0
Grants 0.0 0.0 0.0 0.0 0.0
Total expenditure 17.4 17.5 17.5 17.5 16.7
Current 11.1 10.7 10.9 10.9 11.5
Wages and salaries 4.0 4.3 4.6 4.7 4.8
Goods and services 1.4 1.3 1.3 1.2 1.2
Current expenditure of CSS 0.7 0.5 0.6 0.6 0.7
Transfers to public and private entities 3.2 2.8 2.7 2.7 3.0
Interest 1.7 1.7 1.7 1.8 1.9
Domestic 0.3 0.3 0.4 0.3 0.4
External 1.4 1.4 1.4 1.4 1.5
Capital 6.0 6.5 6.1 5.7 5.2
Accrued spending 2/ 0.3 0.3 0.4 0.8 0.0
Savings 3/ 2.2 2.6 3.0 2.9 1.0
Overall balance 4/ -4.1 -4.1 -3.6 -3.6 -4.1
Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.
1/ Includes public service fees.
2/ Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18.
3/ Current revenues and grants less current expenditure.
4/ For 2015 - 2017, includes spending allowed under Article 34 of Law 38 of 2012.

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Table 3. Panama: Non-financial Public Sector Fiscal Operations, 2015–19
Est.
2015 2016 2017 2018 2019
Revenues 19.7 20.1 20.0 19.7 18.3

Current revenue 19.6 20.1 20.0 19.7 18.3
Tax revenue 9.3 9.7 9.2 9.2 8.2
Nontax revenue 3.7 3.4 4.5 4.4 4.1
o/w: Panama Canal fees and dividends 1.8 1.8 2.6 2.6 2.6
Social security agency 5.6 5.8 5.7 5.6 5.5
Public enterprises' operating balance 0.2 0.1 0.0 0.0 0.0
Other 2/ 0.7 1.0 0.5 0.5 0.4
Capital revenue 0.1 0.0 0.0 0.0 0.0
Grants 0.0 0.0 0.0 0.0 0.0
Expenditure 22.1 22.1 22.2 22.9 21.4
Current primary expenditure 13.6 13.5 13.6 13.7 14.2
Central government 3/ 8.1 7.9 8.0 8.0 8.3
Rest of the general government 5.5 5.6 5.6 5.6 5.9
Social security agency 5.0 5.1 5.2 5.2 5.4
Decentralized agencies 0.4 0.4 0.4 0.4 0.4
Interest 1.7 1.7 1.7 1.8 1.9
Capital 6.6 6.7 6.5 6.3 5.3
Accrued spending 4/ 0.2 0.2 0.3 1.2 0.0
Overall balance 5/ -2.4 -2.0 -2.2 -3.2 -3.1
Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.
1/ Official presentation excludes the operations of the ACP as it is not part of the NFPS.
2/ Includes the balances of the nonconsolidated public sector and revenue of the decentralized agencies.
3/ Different from Table 3 as it excludes the transfers to other agencies.
4/ Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015-18.
5/ For 2015 - 2017, includes spending allowed under Article 34 of Law 38 of 2012.

PANAMA
References
IMF Country Report No. 16/337.
IMF FAD Expenditure Assessment Tool (EAT) – Updated 10/2019.
IMF Framework for Fiscal Analysis of Resource Industries (FARI).
Mitchell, P. (2009): Taxation and Investment Issues in Mining, in Advancing the EITI in the Mining
Sector, A consultation with stakeholders edited by Edited by Christopher Eads, Paul Mitchell and
Francisco Paris.
NI 43-101 Technical Report (2019), Cobre Panamá Project, First Quantum Minerals Ltd.
OECD (2019), Multi-dimensional Review of Panama: Volume 3: From Analysis to Action, OECD
Development Pathways, OECD Publishing, Paris
PWC “Compare mining taxes data tool”.
Vtyurina, S. (2013): “Panama: Taking Stock of a Decade of Tax Reforms”, in Panama Selected Issues,
IMF Country Report No. 13/89, March 2013.

PANAMA
AML/CFT ISSUES IN PANAMA: BACKGROUND AND

POLICIES1
The Panamanian authorities made a high-level political commitment to work with the
FATF and GAFILAT to address the shortcomings identified in their evaluation reports and
enhance financial integrity by improving the country’s AML/CFT regime. While significant
progress towards greater compliance with FATF recommendations has been achieved, the
FATF identified important deficiencies in Panama’s AML/CFT regime that remain to be
addressed. Due to these deficiencies, the FATF placed Panama on their grey list
(International Cooperation Review Group, ICRG, monitoring) of jurisdictions with strategic
deficiencies to combat money laundering and terrorist financing following their June
2019 plenary.
A. Background
1. Panama is vulnerable to money laundering (ML) from a number of sources including

drug trafficking and other predicate crimes committed abroad such as fraud, financial and tax
crimes. It is a country with an open, dollarized economy which, as a regional and international
financial and corporate services center, offers a wide range of offshore financial and commercial
services. The Panamanian financial platform has been under scrutiny for some time, with the
criticism intensified following the inclusion of Panama in the grey list of the FATF in June 2014 2, and
the document leak related to the Mossack-Fonseca scandal in April 2016.
2. The authorities made a high-level commitment to enhance Panama’s financial

integrity and strengthen its AML/CFT regime. Panama conducted a national ML/TF risk
assessment in 2016 to identify potential threats, vulnerabilities, and consequences. The results of the
risk assessment were used to prepare the 2017 national AML/CFT strategy, supported by IMF
technical assistance, the National Strategy to Combat Money Laundering, Terrorism Financing and
Weapons of Mass Destruction Proliferation. The authorities closely cooperate with the Financial
Action Task Force of Latin America (GAFILAT) and other relevant international supervisory bodies. 3
3. While no specific cases of terrorist financing (FT) have been identified to date, the
FATF assesses Panama as vulnerable to FT risks. The country is a key transit hub which attracts a
fair share of migratory flows. 4 Panama’s proximity to Colombia heightens FT concerns amid the
1 Prepared by Marina Rousset (WHD) in close collaboration with Francisco Figueroa (LEG).
2 Panama was removed from the grey list in February 2016.
3 Panama served as vice-president of GAFILAT in 2017 and assumed the GAFILAT presidency in 2018. Panama's
financial intelligence unit, Financial Analysis Unit Panama (UAF), is a member of the Egmont Group, which is a united
body of 164 Financial Intelligence Units providing a platform for the secure exchange of expertise and financial
intelligence to combat money laundering and terrorist financing (ML/TF) in accordance with global AML/CFT
standards.
4 According to the UN Refugee Agency, in 2017 more than 8,000 migrants entered Panama illegally.

PANAMA
recent reactivation of FARC and resurgence of armed conflict in that area. To this end, Panama’s
2017 national strategy recognizes its vulnerability to terrorism financing without the proper
safeguards. For example, the Colon Free Trade Zone (FTZ) is the second largest in the world and
may be exposed to the passage of weapons or dual-use goods in the absence of appropriate
regulations and surveillance mechanisms. The preliminary conclusions of the risk assessment update,
which is currently underway jointly with the World Bank, show FT risks shifting from “low” to
“medium” in Panama, especially in the corporate sector, as transactions of medium and small
companies operating in the FTZ lack adequate onsite supervision.
B. Recent Developments
4. Panama was placed on the FATF’s grey list for monitoring by the ICRG after the June
2019 plenary 5. Due to lack of compliance on 9 out of the 11 immediate outcomes on effectiveness
(details discussed below), the FATF designated Panama as a “jurisdiction with strategic deficiencies”,
placing it under ICRG monitoring until major deficiencies are resolved and reassessed. In response,
the Panamanian authorities adopted an action plan that made commitments to:
• Strengthen their understanding of the national and sectoral ML/TF risks and improve national
policies to mitigate these risks;
• Proactively take action to identify unlicensed money remitters, and ensure effective,
proportionate, and dissuasive sanctions again AML/CFT violations;
• Ensure adequate verification and update of beneficial ownership information, establish an

effective mechanism to monitor the activities of offshore entities, assess existing risks of misuse
of legal arrangements to define and implement specific measures to prevent the misuse of
nominee shareholders and directors, and ensure timely access to adequate and accurate
beneficial ownership information;
• Ensure effective use of its Financial Intelligence Unit (FIU) for ML investigations, demonstrating
their ability to investigate and prosecute ML involving foreign tax crimes and to provide
constructive and timely international cooperation with such offences.
5. Exiting the FATF grey list is macro-critical for Panama. In the absence of policy action,
corresponding bank relationships risk being severed, which in turn would dry up foreign credit and
limit domestic lending, squeezing bank margins and increasing credit risk. This would inevitably
dampen economic activity, with potentially long-lasting negative effects. In addition, the
reputational damage that the new administration may sustain if exiting the grey list protracts
beyond the targeted dates (after the February or June 2021 FATF plenary, as communicated in the
press) can undermine its capacity for reform and weaken its political influence.
5
The FATF grey list includes 18 jurisdictions. Besides Panama, grey-listed countries are Albania, the Bahamas,
Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Syria,
Uganda, Yemen and Zimbabwe. Two countries – Democratic People’s Republic of Korea and Iran – are classified as
“high-risk jurisdictions” and appear on the FATF’s “blacklist.”

PANAMA
6. Panama continues to make progress on technical compliance with the FATF

recommendations. 6 GAFILAT’s latest mutual evaluation report (MER) 7 noted Panama’s progress to
improve its technical compliance by: (i) addressing the deficiencies of technical compliance
identified in 2017; and (ii) implementing new requirements where the FATF recommendations have
changed. The MER recognized the authorities’ continued progress in addressing outstanding
AML/CFT deficiencies and concluded that four FATF recommendations can be rerated from “Partially
Compliant” to “Compliant”, and seven more recommendations demonstrated “improvement of the
technical compliance” albeit without rerating.
Figure 1. Panama: Reporting of Suspicious Activity and FATF Compliance

Reporting of Suspicious Transactions Technical Compliance with the 40 FATF Recommendations
4000
Non-Compliant 2014
3500
(NC) 2018
3000
Partially Compliant
2500
(PC)
2000
Largely Compliant
1500
(LC)
1000
Compliant
500
(C)
0
2012 2013 2014 2015 2016 2017 2018 0 5 10 15 20 25
Sources: Panama’s Financial Intelligence Unit, and the Financial Action Task Force of Latin America (GAFILAT).
7. Committed to exit the FATF grey list by 2021, Panama made significant steps to
improve its legal framework in 2019 and 2020. In chronological order, these include:
• Enacting Law 70 criminalizing tax evasion and the laundering of tax evasion proceeds by
adding it to the Criminal Code and modifying the Tax Code (on January 31, 2019). This implies
that when the tax office has information that in a calendar year an amount of US$300,000 or
above has been evaded, the Tributary Administrative Court can be notified with the appropriate
evidence to file a criminal case through the prosecutor's office. Tax evasion is punishable with a
prison sentence of between two and five years, as well as a financial penalty of between two and
ten times the amount evaded.
• Passing resolution 002-2019 imposing greater controls on financial transactions by

strengthening due diligence to detect fiscal crimes (on April 11, 2019). The document, issued by
the Superintendence of Banks of Panama, regulates rules on customer profiles, resident agent
profiles, and suspicious operations for banks and other fiduciaries.
6For granular stocktaking of Panama’s progress towards FATF compliance since 2013, see SIP on Financial Integrity in
Panama (IMF Country Report No. 19/12), published in November 2018.
7 GAFILAT placed Panama under enhanced follow-up based on the findings of its mutual evaluation report (MER)
published in December 2017. Findings cited here are based on the Enhanced Follow-up Report of Panama, published
in January 2019 (http://www.fatf-gafi.org/media/fatf/documents/reports/fur/GAFILAT-1st-FUR-Panama.pdf).

PANAMA
• Launching a new anonymous platform to report incidents of money laundering (on May
16, 2019). Panama’s Financial Analysis Unit (UAF), jointly with Crime Stoppers (a community-
based crime-reporting program), created an online platform designed to anonymously report
information about who, when, how and where citizens suspect of laundering money. The
platform gained traction with the public, generating 43 reports of suspicious activity to date.
• Passing an amendment to the tax evasion legislature (Law 87 of October 2019 modifying
article 288-J of the Criminal Code) which introduces criminal punishment for repeat tax
offenders. The amendment is aimed at corporations and other legal entities and grants
exemptions from jail time only if the defrauded amount is returned during the investigation
phase and if it does not exceed US$300,000.
• Signing a statement of intent with France, creating a working group to cooperate on fiscal
and financial transparency and AML/CFT measures (on November 28, 2019). Specifically, the
agreement focuses on the adoption of more efficient mechanisms for the exchange of fiscal
information between the two countries. 8
• Introducing criminal penalties for unlicensed money remitters (Law 123 passed on
December 31, 2019), including imprisonment from 5 to 8 years.
• Creating the Superintendence of Non-Financial Entities (Law 124 passed on January 7, 2020).
The law elevates the previous intendance to superintendence status. It was created to strengthen
the supervision of non-financial businesses and professions (most notably, FTZs, lawyers,
construction and real estate companies). This autonomous agency also conducts training and
onsite inspections of relevant entities in the nonfinancial sector.
• Suspending delinquent corporations from public registry (via Executive Decree 905 of
September 20, 2019). In January 2020, 381,000 legal entities were reportedly suspended from
the public registry of Panama (out of a total of 776,000 registered companies) for failing to pay
their fees for three consecutive years or not having a resident agent and will be permanently
dissolved if their status is not33 regularized within 90 days.
• Approving the creation of a s3ingle registry for beneficial owners (Law 169 passed on
February 20, 2020) to enhance the transparency and traceability of the ultimate beneficiary
ownership data for legal entities established in Panama.
• Proposing a law requiring resident agents to obtain and maintain financial statements of
companies established in Panama but operating abroad, and to submit these accounting
records to the fiscal authorities upon request (more precisely, modifying Law 52 of 2016). The
Ministry of Economy and Finance acknowledged in a statement on January 8, 2020 that
although agreements have been signed to exchange such financial information in the past, in
practice no such data are provided. The amendment aims to enforce record-sharing and
enhance tax transparency.
8 Despite the intensified policy dialogue, France communicated its decision to keep Panama on its list of 13 "tax
havens" in January 2020.

PANAMA
• Establishing an AML unit within the customs administration (forthcoming in 2020) staffed
with compliance officers trained to perform due diligence on suspicious transactions. To further
reduce ML risk, the customs administration plans to move away from cash payments to digital
transactions for enhanced traceability.
• Adopting blockchain technology to enhance transaction reporting for goods passing

through the Colon FTZ (forthcoming in 2020) thus reducing FT risk. This effort is spearheaded
by the customs administration.
C. Policy Priorities
8. To address the strategic deficiencies underscored by the FATF’s June decision, the
authorities need to work coordinately to quickly and effectively tackle the four pillars of their
action plan. On the strategic front, designing and implementing a formal communication strategy
should be a key priority for the authorities in order to: (i) ensure that the authorities’ commitment to
expediently address the FATF’s areas of concern is widely acknowledged, (ii) continuously update
GAFILAT and all relevant parties of changes to the AML/CFT national strategy or the legal framework
in a timely manner, and (iii) appraise the domestic agents of any applicable changes. Since GAFILAT
is the relevant regional authority which makes country-level assessments and subsequently informs
the FATF—the international standard setter on AML/CFT—efficiently liaising with GAFILAT is of
utmost importance going forward. On the technical front, creating a taskforce and a roadmap for
the undertaking of necessary reforms is urgent, with necessary assistance available to the authorities
from experts in the field, including at the IMF.
9. While Panama’s AML/CFT regime has demonstrated much improvement in technical

compliance with FATF recommendations over the years, GAFILAT’s assessment of its
effectiveness remains relatively low. GAFILAT assessed Panama’s effectiveness, particularly in
preventing the misuse of foreign and domestic legal entities incorporated in Panama, to be lacking.
According to GAFILAT’s MER published in January 2018, the FTZ, real estate and banking are the
most vulnerable to money laundering as sizable financial inflows are channeled to Panama through
these sectors. The 2018 assessment shows that Panama’s AML/CFT framework is only effective (or
“substantial”) in two areas (preventive measures and financial sanctions related to terrorism
financing and proliferation financing). In all other areas, GAFILAT deemed Panama’s effectiveness to
be insufficient (“moderate” or “low”). This covers Panama’s understanding of risk, international
compliance, supervision, preventive measures, transparency of legal persons and legal
arrangements, financial intelligence, money laundering investigations and prosecution, confiscation,
and terrorism financing investigations and prosecution.
10. Some of the deficiencies in Panama’s AML/CFT regime will take time to address,
although efforts to do so are underway. Urgent policy action in these areas needs to be
undertaken in order to exit the grey list by 2021, as announced by the authorities, as well as to
comply with the international standard, following FATF’s recommendations. Specifically, priorities
include:

PANAMA
• Strengthening customer due diligence (CDD) obligations of resident agents. The passing of
a comprehensive AML Law 23 in 2015, which clarifies CDD obligations of resident agents,
obviates the need for the 2011 special Law 2 which is less strict on CDD requirements. Amending
Law 2 (for which the proposal has been put forth by the authorities but not yet approved) would
remove the legal ambiguity and subject all reporting entities in Panama, including resident
agents, to abide by Law 23.
• Demonstrating the ability to criminalize tax evasion which first needs to be operationalized
either though providing disclosures that proper taxes are filed and paid, or supplying copies of
tax returns to relevant financial institutions – whichever option is acceptable to the authorities
and approved by GAFILAT. Subsequently, should cases of tax evasion be identified, Panama’s
judicial system needs to demonstrate its ability to competently investigate and prosecute such
cases. Given that this law is new, the judicial system and other institutions need to develop the
capacity to do so within a relatively tight timeline.
• Enhancing data transparency on beneficial ownership, building on Law 169. Panama faces
significant challenges ensuring the timely availability of accurate beneficial owner information of
domestically incorporated entities. Concerns over misuse of corporate vehicles led the FATF to
strengthen its standards on transparency, but Panama’s current regulation falls short of these
standards (in fact, Transparency and beneficial ownership of legal persons is the only FATF
recommendation where Panama scored as “Noncompliant” in the latest evaluation). Specifically,
only the information on beneficial owners that control 25 percent or more of an entity were
required to be kept by law. Furthermore, ownership information was difficult to obtain when a
resident agent had lost contact with a corporate entity, and when entities lacked physical
presence in Panama. Under the new law, resident agents are required to provide beneficial
ownership information for all legal entities registered in Panama. In order to pass the
compliance threshold, the authorities need to demonstrate that the ownership registry is fully
operational and adequately collects the required information.
• Dissolving or regularizing the large number of dormant entities. Most of the dormant
corporate vehicles cut off relationships with the resident agent and ceased paying their yearly
license fee. While corporate inactivity in itself is not illegal, provided all accrued fines are paid,
Panama’s large share of dormant companies poses risks to the transparency of ownership
information for CDD purposes. The recent action to remove 381,000 dormant entities from the
public registry is a decisive and encouraging step in the records cleanup process.
• Improving AML/CFT statistics. Given the fragmented nature of AML/CFT oversight and
enforcement in Panama, relevant data are not always shared in a timely manner among agencies
and with third parties. While the national strategy and the UAF aim to streamline and enhance
relevant information sharing, statistical data quality remains of concern. The recently created
roundtables (mesas de trabajo) for AML/CFT cross-agency cooperation aim to make information
sharing timelier and more accurate.

PANAMA
D. Conclusions
11. The newly-formed government needs to prioritize strengthening Panama’s AML/CFT

regime and enhancing its financial integrity to maintain competitiveness. Building on the
momentum of recent legal initiatives to enhance the AML/CFT regime, Panama’s authorities should
prioritize addressing the remaining shortfalls of the legal framework, particularly in light of the FATF
grey listing. In the short run, this requires urgent action to address the FATF’s recommendations
outlined in the June 2019 action plan.
12. In addition to tighter technical compliance with the FATF recommendations, the
authorities need to focus on enhancing the effective implementation of their legal framework
and the accompanying communication strategy. Addressing deficiencies in the effectiveness of
the AML/CFT regime will be challenging and more time-consuming than technical compliance, as it
requires capacity building, enhanced inter-agency coordination, continuous education of reporting
agencies and the public at large, as well as international cooperation. Improving these and other
aspects of the AML/CFT regime will help the authorities meet their financial integrity objectives and
boost Panama’s standing in the international arena.
13. Recent initiatives—legislative actions and other reforms—demonstrate that the new
administration is committed to exit the FATF watchlist as promptly as possible. The authorities
appear very cognizant of the reputational damage Panama stands to incur should the FATF grey
listing protract. In addition to quickly scaling up regulatory measures, they are working on
improving cross-agency coordination and information sharing as well as building capacity and
public awareness to have better control over financial transactions and the passage of goods
through the country.

PANAMA
References
Financial Action Task Force: fatf-gafi.org
Financial Action Task Force of Latin America (GAFILAT): https://www.fatf-

gafi.org/pages/financialactiontaskforceofsouthamericaagainstmoneylaunderinggafisud.html
International Monetary Fund (2020), “Panama: Staff Report for the 2020 Article IV Consultation”, IMF
Country Report (forthcoming).
Okwuokei, Joel (2019), “Financial Integrity in Panama”, Selected Issues Paper IMF Country Report No.
19/12, Washington DC.
Panama’s Financial Analysis Unit: https://www.uaf.gob.pa/

PANAMA
TOWARDS A MORE RESILIENT FINANCIAL SECTOR1

Panama is a small and fully dollarized economy that positions itself as an international
banking center of Latin America. The resilience of its banks (which hold assets double the
size of its GDP), is critical for domestic macroeconomic stability. Conservative banking
and improvements in supervision and regulation have helped Panamanian banks to
remain sound. However, increasing complexity and concentration in Panama’s banking
system call for strengthening the regulatory framework to further safeguard financial
stability. This paper suggests policy options to make the financial sector more resilient.
First, it provides an overview of the financial system and recent trends, summarizes
financial stability oversight and the prudential framework, analyzes the implementation
of Basel III standards, and proposes steps to improve financial oversight and update the
macroprudential toolkit. Second, it advocates the introduction of an effective financial
safety net and upgrading the bank resolution framework. Third, it advises advancing
regulatory framework reforms and coordination, and creating a regulatory sandbox for
the growing fintech industry.
A. Overview of the Financial System and Recent Trends
1. Panama's financial center is twice its economy size and vital in the region, but
smaller and less sophisticated than other major financial hubs 2. As of November 2019, it hosted
79 banks 3, which hold more than 90 percent of the system’s assets, the rest is held by insurance,
reinsurance, securities companies, and pension funds, and financial cooperatives and other entities.
The 46 onshore banks, operating with a general license, form the domestic banking system: they
amount to 86 percent of the entire banking center’s assets, holding 87 percent of the deposits and
88 percent of the credit
Share of the total Share of GDP
portfolio. Although almost Size of the financial system (2019) Billion USD
assets (%) (%)
two-thirds of onshore banks 1. Banks, insurance and securities 130.5 94.6 194.3
are foreign-owned, only one- a) Banks, of which: 125.0 90.7 186.2
third of the system assets onshore banks 107.9 78.3 160.8
offshore banks 17.0 12.4 25.4
and one-fifth of the system
b) Insurance and resinsurance 3.2 2.3 4.8
credit is received by the non-
c) Securities companies and pension funds 2.3 1.7 3.4
residents. General license 2. Other participants 7.4 5.4 11.0
banks can perform both a) Cooperatives 2.2 1.6 3.2
internal and external b) Other financial entities 5.2 3.8 7.8
3. Total assets 137.9 100.0 205.3
operations. Of the 33
offshore banks, 22 hold an Sources: Superintendency of Banks and IMF staff calculations.
1
Prepared by Olga Bespalova (WHD).
2The foreign liabilities of the financial system are about 1/10 of Bahamas, 1/20 of Hong Kong SAR and Singapore,
and 1/40 of the Cayman Islands.
3
See Table A1.2 (Annex) for the details on the structure of the international banking center.

PANAMA
international license (IL), which can conduct business only with non-residents except for very limited
interbank operations, and 11 have representative license (RL) - they cannot engage in any banking
operations, focusing only on promotion activities. Offshore banks rely on external funding, almost all
of which (97 percent) comes from the non-financial private sector (and only 3 percent from banks).
Their assets include loans to non-residents (50 percent), interbank deposits abroad (28 percent), and
foreign securities (22 percent). Thus, their impact on the domestic economy is virtually null; see SIP
(2017).
2. Panama’s banking center continues to consolidate, especially among foreign-

owned banks, leading to higher concentration and systemic risks. Since January 2014, the
number of banks declined from 91 to 794. The onshore system lost four banks: there were seven
exits (four acquisitions by incumbent banks, one voluntary liquidation, one forced liquidation, one
reorganization), and three new entries. The count of the offshore banks declined by eight: the
number of IL-banks declined by Onshore system Offshore banks Banking
five (driven by four voluntary Foreign Panamanian Total IL RL Total Center
liquidations, one forced Jan. 2014 31 19 50 27 14 41 91
liquidation, one sale, and one Nov. 2019 29 17 46 22 11 33 79
Entries 2 1 3 1 4 5 8
new entrant), and the number
Exits, of which 4 3 7 6 7 13 20
of RL-banks decreased by three
- voluntary liquidation 1 0 1 4 7 11 12
(due to seven voluntary exits - forced liquidation 1 0 1 1 0 1 2
with only four entrees). As many - mergers and acquisitions 2 2 4 0 0 0 4
experts have predicted, this - sale with liquidation 0 0 0 1 0 1 1
trend may continue, as smaller - reorganisation 0 1 1 0 0 0 1
banks with lower profits and Net change -2 -2 -4 -5 -3 -8 -12
higher NPLs, may not be able to Sources: Superintendency of Banks and IMF staff calculations.
cope with increasing operational costs (due to more stringent AML/CFT regulations and
implementation of Basel III standards), and therefore may choose to be acquired by larger peers or
exit the industry 5. As a result, large and medium banks grow further, increasing concentration in the
banking system. In 2019, seven largest onshore banks were holding about 65 percent of the total
banking system’s assets (up from 62 percent in 2015).
3. Panama’s financial center, which contributes around 7 percent of GDP every year,
is critical for macroeconomic stability. Reliance on conservative banking practices 6 and high
balance sheet buffers may not be enough to mitigate increasing systemic risks. This paper suggests
policy options to improve financial stability oversight and prudential, develop financial sector safety
nets and improve bank resolution framework, and advance regulatory framework and coordination.
4 See Table A1.1 (Annex) for details on the structure of the International Banking Center.
5 In February 2020, Banco Aliado absorbed Banco Panama (both domestic GL-banks). In December 2019, one license
was cancelled (Bank G&T Continental (Panama), S.A.) and one RL-bank (Bank Julius Baer & Co. ltd., Switzerland)
initiated its voluntary liquidation.
6 Banks’ lending portfolio constitutes 2/3 of total assets, with 80 percent of liabilities coming from deposits. Activities
related to trading derivatives, structured-products or foreign exchange are limited. Banks invest in tradeable
securities, of which about 2/5 are corporate bonds and 3/5 public sector bonds.

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B. Improve Financial Stability Oversight and Prudential Framework
Financial Stability Oversight

4. The Superintendency of Banks of Panama (SBP) has developed a broad regulatory
framework to ensure compliance with international standards and best practices, increased
transparency of the system, and strengthened systemic risk oversight. It covers the
classification of assets, capital adequacy, market risk, corporate governance, external auditors,
mergers/acquisitions, and prevention of the misuse of financial services for money laundering (ML)
and financing of terrorism (FT) 7, among others. Since 2002, the SBP increased its transparency by
reporting all the statistics of international assets and liabilities to the Bank of International
Settlements (BIS) in Basel (although Panama is not a BIS member). Publications of the annual
Financial Stability Report (FSR) and monthly updates also contribute to higher transparency. The
systemic risk oversight includes monitoring the financial stability map (FSM) and critical risk factors,
identification and analysis of the domestic systemically important banks (D-SIBs), and
implementation of risk-based supervision and stress testing.
5. The SBP uses an FSM to track risk

Financial Stability Map
developments in the banking system (see chart). (Domestic banking system) Macroeconomic
risks
It measures five types of risks, proxied by quarterly
Base
9
2017
indicators. Deviation of the variables along each
7
2019
5
dimension from the baseline (2010-15) determines Liquidity risks
3
External risks
the risk score from 1 (the least risk) to 9 (the highest 1

-1
risk). The latest FSM shows that in 2019 credit risks
declined compared to 2017. The SBP could further
enhance the FSM by extending the number of risk Solvency and
Credit risks
indicators in line with Cervantes at al. (2014), as well
profitability risks
as by including results of the stress tests – see Table Sources: Superintendency of Banks and IMF staff calculations.
A1.4 (Annex) for the list of currently used and

proposed additional indicators.
6. The SBP also monitors systemic risks using a version of an international rating system
CAMELS, which could be enhanced further. The analysis is conducted for groups of banks, ranked
by their assets size. The indicators used in the analysis include (but not limited to) capital adequacy
(share of tier 1 capital to total capital and capital adequacy ratio), asset quality (coverage of NPLs by
provisions and growth of NPLs 8), management income, earnings (ROA), liquidity, financial strength,
credit risk, market risk, etc. To rank the banks’ performance as strong, satisfactory, less than
satisfactory, deficient, or critically deficient, the SBP would need to develop a scale to map the
indicators into ratings (see Table A1.3 in Annex for a sample).
7Rules 5-2015 and 10-2015 establish due diligence procedures for customer and interbank regulations, including the
know-your-customer (KYC) requirement for banks, trusts, and other financial entities. Rule 6-2016 aims to prevent ML
and FT that may arise from cross-border correspondent banking relationships. Rules 9-2015 and 12-2015 set punitive
administrative proceedings for potential violations of the ML/FT prevention.
8 In this exercise, the SBP defines NPLs as all past-due loans late by at least 30 days.

PANAMA
7. The SBP has identified nine D-SIBs, ranking three as presenting the highest systemic
risks, four - medium, and two others are the least systemic. The methodology used by the SBP
builds on the Basel recommendations and considers banks’ license type, and a number of indicators
on the banks size relative to GDP, substitutability, interconnection, inter-jurisdictional activity, and
complexity. The SBP ranks the D-SIBs ranks, weighting each indicator by its importance and then
sorts all the banks in three buckets as those presenting the highest, medium, and least systemic
risks. To fully align with Basel recommendations, the SBP needs to (i) publish the methodology it
uses to identify the D-SIBs; (ii) make the list of D-SIBs and their ranking public and update them at
least annually; and (iii) implement the higher loss absorbency (HLA) requirement (in percent of the
RWA, to be met with the tier I capital) differentiated by the risk bucket. Also, given a large difference
in the size of the nine D-SIBs (their assets range from 6 to 25 percent of GDP), the SBP may consider
using a more granular ranking scale (e.g., with five buckets) 9.
8. Stress tests consider the impact of macroeconomic shocks to the banking sector on
asset quality and bank capital adequacy. The SBP conducts stress-tests to credit portfolio and
capital adequacy using a regression and balance sheet approach, developed with the Fund technical
assistance (TA). Such tests consider baseline, moderate, and severe scenarios, and are applied both
to the whole banking system and to the individual banks/groups of banks. Results show that banks
would remain adequate even in the event of severe macroeconomic and interest rate shocks. The
SBP could enhance stress-tests through: (i) considering more extreme shocks (e.g., with a prolonged
recovery), potential cross-border bank failures or a distress in the financial groups; (ii) developing
top-down liquidity stress-tests; and (iii) implementing the bottom-up internal capital adequacy
assessment process (ICAAP), requiring banks to do independent stress-tests of credit and market
risks, which would be compared to the top-down stress test by SBP.
9. The SBP carefully monitors indebtedness of households and firms, and pays increasing
attention to the real estate market. From 2014 to 2019, the composition of private credit has
changed: household indebtedness to banks rose from 35 to 42 percent of GDP, while the loan
obligations of firms declined from 42 to 40 percent of GDP. Such a rise in household debt, although
still low compared to financial centers (e.g., 54.2 percent of GDP in Singapore and 72.2 percent of
GDP in Hong Kong SAR), requires vigilant monitoring. The recently raised threshold for preferential
loans and the high demand for low-price housing stimulated preferential mortgage credit, leading
to the increasing debt among low-income households, which could potentially raise credit risks.
Due to the prolonged weaknesses in the construction and anecdotes of a relative oversupply in a
high-price segment of the real estate market, the SBP began monitoring the price index of new
housing (VNPI) and monthly index of construction activity (IMACO). The VNPI uses the data
collected by a private third-party provider (La Galería Inmobiliaria 10). In 2018 the aggregate index of
house prices continued to grow, although at lower rates. The IMACO index shows that the
construction sector is shrinking. Thus, it is critical to monitor loan exposure to the construction
sector, which could shrink further and deteriorate in quality.
9
For example, Hong Kong Monetary Authority set the HLA surcharge of 1-3.5 percent, gradually phased-in 2016-19.
10
It uses monthly surveys to monitor detailed information about new homes for sale from the moment it is first
offered for sale until the last unit is sold. Residential prices for Panama are also available at www.numbeo.com

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Figure 1. Panama: Monitoring of the Housing Prices and Construction Activity

Variation in the Price Index of New Housing (VNPI) Index of the Monthly Construction Activity
(In percent) (In percent)
25 4
IMACO (quarterly)
20 3 IMACO_MA (quarterly)
2
15
1
10
0
5
-1
0 -2
-5 -3
Jan-08 Ju l-09 Jan-11 Ju l-12 Jan-14 Ju l-15 Jan-17 Ju l-18 Jan-20 Ju n-11 Ju n-12 Ju n-13 Ju n-14 Ju n-15 Ju n-16 Ju n-17 Ju n-18 Ju n-19
Sources: Superintendency of Banks and IMF staff calculations.
Adoption of the Basel Committee on Banking Supervision (BCBS) Standards
10. The authorities made significant

Compliance with BCPs
progress in aligning the SBP’s regulatory 30 Compliant
Largely compliant
practices with the Basel Core Principles (BCPs). Materially non-compliant
25
Panama has received several evaluations of their
20
regulatory framework (in 2001, 2007 and 2011). In
2011, it was fully compliant on 17 of 25 principles, 15
compared to only 9 in 2001 (see chart). Higher 10
compliance scores reflect enhanced off-site, 5
consolidated, and cross-border supervision, and 0

improved analysis of the investment and licensing 2001 2007 2011
Sources: Based on formal assessments by the IMF.
criteria, among other. Law 2-2008 enhanced the
SBP’ powers by putting in place a more flexible and comprehensive bank resolution process,
extending its supervisory authority to the holding company and affiliates of supervised groups and
making more explicit that its authority includes the definition the group’s perimeter and the
identification of affiliates and related entities.
11. Panama made progress on several fronts since the 2011 assessment. Thus, it adopted
capital requirements on operational risk, updated its capital adequacy framework, and addressed
most deficiencies found in the 2011 assessment in newly introduced regulations. However, some
issues identified in 2011 are still unresolved: (i) lack of regulation on the interest rate in the banking
book (the SBP is ready to adopt in 2020); (ii) lack of guidance on transfer risk; (iii) dependence of the
superintendent’ term on the political cycle. The Basel standards evolve, and the SBP is adopting new
regulations to catch up. The BCP list is changing and now includes 29 criteria, but the assessment
based on the latest metrics is not available. For example, rules 5-2015 and 8-2019 have updated
regulations on the corporate governance, but the assessment of this principle is not available.

PANAMA
12. Basel III requires banks to have higher levels of capitalization and liquidity, allowing
proportional implementation of new standards by the emerging markets. While new rules
strengthen banks' capacity to absorb losses, they may have a negative macroeconomic impact
through the interest rate channel, as banks would pass higher operating costs to their clients. For
example, the OECD estimated that implementation of Basel III could increase lending costs on
average by 15 basis points due to an adoption of the updated minimum capital requirement and by
50 basis points after adoption of the capital conservation buffer (CCoB) 11.
13. Panama is the first Central American country to embrace Basel III standards on capital
and liquidity. Panama partially adopted Basel III regulations on capital adequacy (Basel Core
Principle 16) 12. Rules 1-2015 and 13-2015, which were gradually phased in by January 2019,
increased the minimum capital requirement (to 4.5, 6, and 8 percent of RWA for the common Tier
I capital, Tier I capital, and total capital, respectively), and limited the leverage ratio at 3 percent.
However, current capital adequacy regulations do not include either the CCoB buffer (2.5 percent of
common equity) or a countercyclical buffer (CCyB). In Basel III, adoption of the former is required,
while implementation of the latter is at the authorities’ discretion.
14. To bring its capital regulations closer to Basel standards, the SBP should consider
adoption of the CCoB for all banks and HLA capital surcharge for D-SIBs. The SBP already
included adoption of the CCoB in its strategic plan. The SBP is considering adoption of a capital
surcharge for the D-SIBs. Analysis shows that D-SIBs would be able to absorb a further additional
capital buffer of 2.5 percent of RWA, however, this assessment does not consider the potential
impact of capital charges for market and operational risk, and does not take into account parallel
introduction of the CCoB. In future, the SBP could consider feasibility for the adoption of the CCyB 13.
Table 1. Panama: Capital Adequacy Ratios in Percent of Risk-Weighted Assets (RWA)
Minimum requirements 1/ Desired levels

Type of capital With 2.5 percent in capital With 0-2.5 percent in
Without buffers
conservation buffer countercyclical buffer
Common equity 4.5 7 7-9.5
Total tier 1 6 8.5 8.5-11.0
Total 8 10.5 10.5-13
Sources: BIS and IMF staff calculations.
1/ Banks must constrain dividend distributions if these ratios are not met.
11Slovik, P. and B. Cournède (2011) estimated that in advanced economies such an increase in the interest rates
could lower growth by 0.05-0.15 percentage points per annum.
12 The Banking Law (article 7) required banks to have a minimum of 4 and 8 percent of RWA in Tier I and total
capital.
13
All the BIS members and Norway have already adopted the CCyB regulations. However, most of them have set
zero requirements. Hong Kong SAR has 2 percent CCyB requirement.

PANAMA
15. SBP advanced in revising its regulations to Basel III standards on the risk coverage.
• Credit and counterparty risk (BCP 17). Rule 4-2013 established specific and dynamic
provisioning on credit, and set rules to assess collateral value. Dynamic provisioning, which is
governed by a macroprudential motive and established on the normal portfolio, has
countercyclical capacity, but is not equivalent to the countercyclical capital buffer 14. Rules 3-2016
and 8-2016 established the risk weights for the different segments of banks' credit portfolio, in
line with the latest standards of Basel III. Thus, mortgage loans had a relevant change
concerning the previous weights as with consumer loans (cars, individuals) depending on their
maturity. These rules also determine how to evaluate collateral of different categories.
• Market risk (BCP 22). Rule 11-2017 established typology of different derivative contracts and
good practices in their management, and requirements of normalized capital according to the
nature of the derivative, term and underlying. Rule 3-2018 created capital requirements for the
financial instruments (bonds, securities, shares, forwards, swaps, options) registered in the
trading book, and established restrictions on moving instruments between the books.
• Operational risk (BCP 25). Rule 11-2018 established capital requirements on operational risk
and established standards for the operational risk management framework, including prudent
policies and processes to identify, assess, evaluate, monitor, report and control or mitigate
operational risk on a timely basis.
• Country risk (BCP 21). Rule 7-2018 prescribed the methodology to assess country risk and sets
provisions on country risk management, which depend on the country risk classification set
within this standard. Yet, there are no guidance or provisions established on the transfer risk.
Table 2. Panama: Implementation of the Main Elements of the Basel III

Package in Panama
Element of Framework Implementation SBP Rules
Capital Adequacy Common tier 1/RWA>4.5 percent of RWA 1-2015
Total tier 1 capital /RWA>6 percent
(Tier 1 + Tier 2 capital)/RWA >8 percent
Capital conservation buffer Common equity/RWA= 2.5 percent Planned for 2020-2021
Countercyclical capital buffer Common equity/RWA = 0-2.5 percent N/A
Leverage ratio Common tier 1 / total exposure to the non-RWA in and 1-2015
off-balance sheet>3
Risk coverage Credit risk, including counterparty credit risk 4-2013, 3-2016, 8-2016
Market risk 11-2017, 3-2018
Country risk 7-2018
Operational risk 4-2018
Capital surcharge for D-SIBs Capital surcharge for D-SIBs Considered
Liquidity Coverage Ratio (LCR) High quality liquid assets / Net cash outflows in 30-day Gradually adopted
period >=1
Net Stable Funding Ratio (NSFR) Amount of stable funding (ASF) / required amount of Need to consider
stable funding (RSF) >=1
Source: BIS, Superintendency of Banks
14
See Wezel T. et al (2012).

PANAMA
16. Panama advanced on the adoption of Basel III liquidity15 standards by gradually
phasing in the Liquidity Coverage Ratio (LCR) 16, but it still has not considered the Net Stable
Funding Ratio (NSFR). Rules 2-2018 and 4-2018 improve the system's ability to react to short-term
liquidity risks by setting a minimum LCR, defining the early warning indicators of the liquidity
distress, and requiring banks to change the treasury management and forecast inflows and outflows.
The LCR is determined as a ratio of high-quality liquid assets to the 30-day total net cash outflow.
LCR will be applicable at a rate of 50–100 percent, as determined individually for each bank, after a
gradual phasing-in. This is different from the Basel, which requires that once LCR is fully phased-in, it
applies to all banks at a rate of 100 percent. The Basel III package also includes the NSFR that aims
to reduce funding risks at the medium-term horizon, the authorities should consider the feasibility
of introducing the NFSR in the future, once the LCR is fully rolled-in (planned by the end of 2022).
Prudential Framework
17. The SBP uses a framework of macroprudential and microprudencial policies to fulfill
its mandate by the Banking Law (Law 52-2008) to ensure the soundness and efficiency of the
banking system. The microprudential supervision focuses on the soundness of each banking
institution using a risk-based supervision approach, with both on-site and off-site examinations. The
macroprudential supervision aims to establish the rules aimed at the prevention and mitigation of
the systemic risk 17 and increase resilience of the banking system. To enhance early detection of the
vulnerabilities, it is necessary to enable forward-looking assessment of risk profile of each institution.
18. In its macroprudential toolkit, Panama has two broad-based measures and two sector-
specific measures. Broad-based tools include the limit on the leverage ratio, and dynamic
provisioning, as set out in rule 4-2013, which should be within 1.25–2.5 percent of RWA
corresponding to the normal loan portfolio, and cannot be lower than in the previous quarter,
unless due to the conversion of dynamic into specific provisions. 18 The former restricts banks from
excessive risk-taking by capping the growth of the RWA, thus preventing procyclical deleveraging of
banks that could impact negatively on the broader financial system and the economy. The latter
15Articles 73–78 of the Banking law establish general liquidity requirements, including the 35 percent ceiling on the
minimum liquidity requirement, and definition of the liquid assets.
16Introduction of the LCR is parallel with the legal liquidity index (established by rule 4-2008), which sets 30 percent
minimum requirement on liquid assets specified in the rules (including cash and certain debt securities) as a share of
qualifying deposits (it covers 186 days horizon).
17 Systemic risk is defined here as the risk of disruptions in the provision of key financial services that can have
serious consequences for the real economy. It is related to the interconnectedness of financial institutions and
markets, common exposures to economic variables, and procyclical behaviors (IMF, FSB, BIS, 2011).
18The amount of dynamic provisions (DPR) is calculated as: DPR(t) = αL(t) + βmax{∆L(t), 0} - SP(t), where α = 1.50
percent, β = 5.00 percent, L(t) = RWA for loans classified under the normal category, and SP(t) = variation in the
balance of specific reserves. The DPR is a capital account that is paid or credited to the retained earnings account.
The credited balance of the dynamic reserve is part of regulatory capital but cannot be included in the calculation of
capital to meet the regulatory minimum of 8 percent (i.e., banks need to maintain the DPR above it).

PANAMA
reduces procyclicality of banks’ provisions and earnings, and thus their probability of default (see
Torsten, 2012); it is efficient in the long-term but does not necessarily help to address short-term
vulnerabilities. Sector specific measures include capital requirements, determined by the risk
weights, set by the type of loan, loan-to-value ratio (LTV), and features of collateral (see by rule
3-2016 19).
19. The macroprudential toolkit in Panama could be extended through the more flexible
use of leverage ratio, dynamic provisioning requirement, and risk weights. For example, stricter
leverage ratio, higher dynamic provisioning could contain credit boom and decrease vulnerabilities
due to market correction. Higher risk weights for certain types of loans could contain credit in the
riskier sectors.
20. In addition, the authorities could consider adoption of new macroprudential tools:
• Setting maximum LTV. Higher limits on LTV will lead to larger down payments and limit
leverage of borrowers. In the past, while dealing with the impact of the Global Financial
Crisis (GFC), Panamanian banks effectively limited the loan-to-value ratios and set high
presale requirements, which helped to contain exposure to construction and protect balance
sheets. However, such measures were taken by banks as self-insurance, without the policy
set by the SBP20.
• Setting maximum debt-to-income (DTI) or debt-service-to-income (DSTI) ratios. To

include these instruments in its toolkit, the SBP has to begin requiring banks to periodically
update data about income of the borrowers and report the DTI and/or DSTI ratios. Once it
has regularly updated DTI and DSTI ratios, the SBP can set prudential limits and conditions
to trigger them. For example, Hong Kong SAR and Singapore have used such instruments to
influence market and price developments, occasionally adjusting limits as market dynamics
change. 21 Note, that the existing practice of automatic payroll deductions for household
credit effectively limits debt service to 50 percent of households’ income, putting a ceiling
on the DSTI. However, if the authorities find that optimal DSTI below 50 percent on
household debt is justified, they could apply the DSTI or a corresponding limit on the DTI
ratio.
19For example, risk weights for the personal, mortgage, and corporate loans are set as follows: 35 percent on
mortgage for main home if LTV<80 percent with the appraisal completed in the last 3 years; 50 percent on mortgage
for main home if 80<LTV<100 percent with appraisal within 10 years or if LTV<80 percent with appraisal older than 3
years; 50 percent on mortgage for second home if LTV≤80 percent with appraisal within 5 years; 50 percent on other
loans (personal or corporate) with commercial real estate pledges if LTV≤ 60 percent (or with residential property
pledges if LTV≤70%) with appraisal within 3 years; 100 percent on other mortgages not listed above.
20 To implement LTV, the SBP would have to require banks to submit data on the market value of the real estate.
21 See Wong et al. (2011) on LTV as a macro-prudential tool.

PANAMA
C. Develop Financial Sector Safety Nets and Improve Bank Resolution
Emergency Liquidity Assistance
21. Banks are a key source of liquidity in Panama’s fully dollarized monetary system
without a central bank—is vulnerable to potential a sudden stop of capital inflows. Interbank
deposits abroad are about 3 times larger than interbank deposits parked domestically, since many
foreign banks hold their liquid assets in their parent banks. The National Bank of Panama (BNP),
which acts as a fiscal agent of the government, also holds sizable reserves abroad. The GFC crisis
showed that under stress, the interbank markets can freeze due to high holdings of the banks’
liquidity abroad in foreign banks, segmentation of the interbank markets (foreign banks would not
lend to small Panamanian banks), and insufficient collateral, constraining transactions. A similar
situation could arise with a dry-up of international liquidity caused by a problem in the U.S. or other
advanced economies, loss of the correspondent banking relationships (the risk of which is higher for
smaller banks) due to country’s inclusion in the “grey” AML-CFT or tax haven lists, or another
instance of government arrears on the preferential mortgage interest rate 22.
22. The financial stimulus program (FSP) to provide liquidity to the system was created in
2009, with limited success. 23 The FSP aimed to provide liquidity to the system for US$1.1 billion.
The funds came from the BNP (US$400 million), the Andean Development Corporation (US$210
million), and the Inter-American Development Bank (US$500 million). The funds were to be
managed by BNP through a trust that would extend loans to financial institutions, which would, in
turn, were required to offer credit using standard criteria. BLADEX assessed the creditworthiness of
applying financial institutions. However, banks did not draw much into these resources, mainly
because their liquidity remained ample, the conditions of access to the FSP resources were not
favorable due to relatively high borrowing cost and collateral requirements, and they had negative
perception against the “red tape”.
23. To strengthen stability of the banking sector, the authorities are considering the
creation the National Liquidity Fund that could provide short-term liquidity to the system.
There were public discussions that at the beginning, the fund would be small (perhaps US$500
million), and available only to the non-systemic, solvent banks with general license. It would operate
as a discount window and be held in the BNP, which, as fiscal agent, maintains the country’s
payment system, keeps government deposits, and extends public credit. However, it would require
legal changes to give the BNP the right to claim the funds back in case of bankruptcy. Thus, the
fund’s creation could require changes to institutional arrangements and the judicial powers of the
regulatory agencies.
22
In July 2019, new government uncovered unrecorded debt to the banks on the preferential interest rate, which
reportedly created shortage of liquidity in the system; these arrears were paid in December 2019.
23 Panama Announces $1.1 billion Economic Stimulus Plan. Latin American Herald Tribune.
http://www.laht.com/article.asp?ArticleId=326173&CategoryId=14088

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Deposit Insurance Scheme
24. So far, Panama has managed resolution of failing banks well, without disruption of the
system, but an explicit deposit insurance scheme (DIS) would further strengthen the banking
center. Article 167 of the Banking Law establishes that in case of liquidation, new deposits obtained
during the reorganization and deposits lower than US$ 10,000 have the first and second priority,
which ensures the stability of the deposit base and benefits the interest of small savers. Depositors
of the failed banks lose access to their funds during the bank resolution process, which may be
lengthy in Panama due to shortcomings in the framework as discussed in the next section.
According to the International Association of Deposit Insurers, Panama is only one of 26 countries
worldwide without an DIS. Most recently, Costa Rica established a Deposit Guarantee Fund for both
public and private banks, which was a requirement to join the OECD.
25. There are several modalities in design of the DIS. The legislators should choose the
deposit base from which to assess the DIS premium (e.g., from all deposits, or only on insured
deposits, or only on deposits in a particular sector such as households); coverage also of foreign and
inter-bank deposits; existence and size of co-insurance; structure of premiums (flat rate or risk-
adjusted graduated rate) and their size (in the international practice, from 0.05 to 1.85 percent);
whether membership is voluntary or compulsory; the source of funding and administration (private,
public, or joint); and whether the DIS would play a role in the resolution process 24. In Panama,
consideration should be given to a DIS funded by Features of Deposit Insurance Worldwide
(Proportion of countries, in percent)
banks, who pay risk-adjusted premiums—such 100
Risk-adjusted premiums
scheme limits excessive risk-taking by banks (see 80
Permanently funded scheme
Foreign currency deposits covered
Urrutia, 1989). Government could consider providing Payment per depositor
Compulsory membership
initial funds for the DIS, which would start operating
60
Interbank deposits covered
as an autonomous agent once premiums 40
accumulated to a sufficient amount . Main functions

25
20
of such fund would be to collect premiums, invest
the funds’ assets, pay insured deposits, and,
0
Sources: Demirguc-Kunt, Asli et al (2005).
participate in the crisis management.
Bank Resolution Framework
26. There is significant room to improve Panama’s bank resolution framework 26. As it
stands, the framework does not clarify objectives, triggers for intervention, and types of corrective
measures; lacks the choice of robust resolution tools; and limits the SBP’ resolution powers27. The
new Bank Resolution Law could help to address these issues. In particular, the new law could:
The IADI (2014) suggests that an effective DIS would include such features as sound public backstop, participation in crisis
24
management coordination arrangements/exchange of confidential information, and legal protection for staff.
25
For example, at a rate 0.5 percent, during the first 10 years the DIS would gather only 5 percent of the deposit base (not
adjusted for inflation).
26
An effective bank resolution framework should help to maintain financial stability providing continuity of the bank's
critical functions, restoring the viability of the bank or at least some of its parts, protecting the creditors and public funds,
and minimizing the costs of the process and destruction of value.
27
The rights of shareholders are not suspended at any stage of the process.

PANAMA
• Clearly define objectives and triggers for the intervention, and types of corrective
measures to deal with non-compliance and/or financial distress. Having a list of the
qualitative and quantitative indicators could help to justify the SBP’s decision to intervene
and prevent potential legal disputes regarding the bank resolution process. The list should
be open-ended, flexible and forward-looking, so that an action can be taken in case of a
breach that has not been previously recognized, and the corrective measures should be
proportional to the breach.
• Provide a “menu” of the robust resolution tools, e.g., a modified framework for mergers, a
transfer of assets and liabilities tool, bridge bank tool, and forced recapitalization tool.
• Give the SBP powers to assume control if the banks in resolution and establish a
sanctioning regime. Currently, the SBP has no tools to neutralize unfit shareholders, whose
influence can jeopardize sound management practices of the bank (e.g., suspension of their
voting rights, order to sell shares, etc.). A “sanctioning committee” could be established as a
special collegial decision-making body to deal with the non-compliance of regulatory
standards and financial distress.
These amendments can help to shorten the resolution process, protecting the value of assets and
claimants’ funds, and make it more efficient, preventing potential legal disputes about the outcome
of resolutions, especially in cases with unfit shareholders, whose influence can jeopardize sound
management practices of the bank.
D. Enhance Regulatory Framework and Coordination
Roles within the Financial Coordination Council
27. Currently, the Financial Coordination Council (FCC) is a collegial body that aims to
facilitate information exchange and discuss newly planned regulations 28, but it is not
authorized to make decisions or set system-wide policies. The FCC 29, established by Law 67-
2011, coordinates actions of the financial sector supervisors through bi-monthly meetings. Its Board,
chaired by the Superintendent of Banks, includes five full members and two associate members30.
The Superintendencies of Banks, Securities Markets, and Insurance and Reinsurance also serve in
each other Boards of Directors, therefore enhancing policy coordination. There are several options
to enhance the role of the FCC. First, the FCC could move towards a more centralized supervisory
28
Over 2014-18, the FCC discussed such topics as consolidated results of the financial system, risk-based and
coordinated supervision, bank resolution, AML/CFT regulations and GAFILAT assessment, negotiations of free-trade
agreements, and draft MOU between the CCF members.
29
Resolution 1-2012 approves internal regulation of the FCC (see Gaceta Oficial 27086 on July 26, 2012).
30
The former include the superintendents of Securities Markets and Insurance/Reinsurance, the executive directors
of the Panamanian Autonomous Institute of Cooperatives and the Pension Savings and Capitalization System of
Public Servants, and the National Director of Financial Companies of the Ministry of Commerce and Industry (which
oversees financial, leasing, remittance companies, and pawn shops). The latter include the directors of the Financial
Analysis Unit and the Technical Accounting Board, they have a right to participate and speak but not to vote.

PANAMA
structure (as, for example, the Financial Policy

Committee in the United Kingdom). Second,
mandate of the FCC could be expanded with
powers to facilitate inter-agency exchange of
information for purposes of the crisis
management and resolution; supervise and
assess systemic risks under hypothetical
scenarios; develop coordinated plans for crisis
preparedness, management, and resolution
activities in good times; and set
macroprudential policies.
28. The Ministry of Economy and Finance (MEF) should increase its role in the current
crisis management and resolution framework. Currently, MEF does not participate in the FCC
and does not have an assigned role in providing a public financial backstop to facilitate resolution.
Bringing in MEF on Board of the FCC and clearly defining its role in providing a public financial
backstop to facilitate resolution 31.
29. Panama has made progress in consolidated supervision. Panama participates in the
regional coordination bodies—Association of Supervisors of Banks in Americas (ASBA), and the
Central American Council of Superintendents of Banks, Insurers, and other Financial Institutions -
aiming to enhance the monitoring of systemic risks and secure regional financial stability. The SBP
coordinates closely with other banking supervisors within the region. Rules 7-2014 and 2-2016 set
standards for the consolidated supervision of banking groups. To mitigate structural systemic and
interconnectedness risks, rules 6-2009, 5-2013, and 5-2016 restrict risk concentration for economic
and banking groups and related parties, limiting large exposures for banks by 25 percent of
consolidated capital for a single counterparty.
Regulations for a More Modern and Inclusive Financial System
30. Panama's comparative advantages, such as high-speed internet 32, a significant number
of internet users, low taxes, and lack of sectoral regulations, attract diverse fintech start-ups.
It already participates in the international online payment systems, cryptocurrency trade 33 ), and
31
Another potential full FCC member could be the Superintendency of the Non-Financial Entities (SNFE). The
Ministry of Housing and the Ministry of Agricultural Development could become associate members. These two
ministries oversee two non-deposit taking public development banks, lending to the low-income population —the
National Mortgage Bank (BHN), and the Agricultural Development Bank. The BHN, in its turn, supervises savings and
credit associations. See Dehesa (2006) for details on public banks in Panama.
32Seven submarine fiber optic cables passing through Panama, connect it with the Electrical Interconnection System
of the Central American Countries (Siepac) and the Central American Telecommunications Network (RedCA).
33 Large trader of bitcoin futures and options Derbit announced its move from Netherlands to Panama in 2020.
(continued)

PANAMA
hosts initial coin offerings (ICO) by the blockchain operators and cryptocurrency traders. Some local
banks have begun to capitalize on the fintech potential to reduce costs, increase efficiency and
competition, and broaden access to the financial sector for the underserved population, and rolled
out mobile wallet apps 34. Local banks reportedly cooperate with fintech start-ups and facilitate the
trade of digital currencies. The PanaFintech Association, established in 2017, promotes
communication between the main actors of the fintech ecosystem (regulators, entrepreneurs,
technical talent, universities, financial sector) and participates in the regional body—the Ibero-
America Fintech Alliance.
31. The growing fintech industry in Panama calls for policies to digitalize economy,
strengthen cybersecurity and create a regulatory sandbox. The Bali Fintech Agenda, supported
by the IMF, encouraged its members to embrace new opportunities, while being vigilant of the risks.
To realize its Strategy for the Development of the Information and Communication Technologies,
Panama began to update its IT systems and roll out new digital platforms. In 2018, Panama moved
up to the 66th place in the United Nations E-government Development Index (compared to the 114th
rank in 2016). However, in the Global Cybersecurity Index (GCI) Panama fell to 97th from 62nd place
in 2018 compared to 2017. Thus, Panama needs to advance its cybersecurity framework 35 and
implement the best practices (e.g., Uruguay ranks the 3rd in the Americas after the USA and Canada
in the GCI). A regulatory sandbox for the fintech could help Panama to stimulate growth of the
industry while containing potential risks. In 2018, the authorities prepared a draft Bill for the
Modernization of the International Financial System of Panama, but it was not finalized 36. Today, the
government prioritizes developing a sandbox using the best international practices.
32. Creation of a regulatory sandbox for fintech should take into account the latest
recommendations on the subject from relevant supervisory bodies. For example, IMF (2020):
Institutional Arrangements for Fintech Regulation and Supervision discusses what fintech
developments mean for the financial sector supervisors. The IMF (2019): Regulation of Crypto-Assets
argues that effective regulation of financial services promotes long-term economic stability and
minimizes the social costs and negative externalities from financial instability, and the same
underlying principles are applicable to the regulation of crypto assets 37.
33. Recent fintech legislation of Latin American countries provides good examples. For
example, Mexico enacted a comprehensive fintech law and complementary regulations, which take
full effect in 2020. Brazil issued regulation on the crowdfunding and peer-to-peer lending, and
created a special congressional commission which is working on a broader law. Colombia and
34E-wallets allow opening a simplified digital savings account, which can be used to pay online and in shops with
quick response (QR) codes, and transfer money between cell phones.
35 Panama ratified the Budapest Convention on Cybercrime of the European Council in 2014.
36It aimed to define functions and regulation of the specialized financial entities (with powers to open and manage
payment accounts, transfers, remittances, and issuance of e- money, and set their regulation) and collective financing
centers or crowdfunding platforms; and to clarify regulation of the ICO by the SSM.
37 The U.S. Securities and Exchange Commission published a warning against initial exchange offerings. The Financial
Services Agency of Japan proposed draft bill to impose stricter leverage limit on crypto-currency traders.

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Argentina have set norms for crowdfunding, while warning investors against cryptocurrencies. The
Chilean commission on financial market has issued a white paper to set regulatory parameters for
the industry, focus on crowdfunding, roboadvisory services, and payment systems. The banking
regulator in Peru has issued strategy on crowdfunding and payment systems.
E. Conclusions: Key Recommendations
34. The authorities should consider taking action to strengthen the regulatory framework
to safeguard financial stability and make the system more resilient, in particular:
• Strengthen financial stability oversight: (i) inform the risk monitoring by a larger number of
indicators, including from the results of stress tests; (ii) enhance stress-testing by considering
more severe shocks, including those with a prolonged recovery, cross-border, and financial
group failures; implement the ICAAP to complement the top-down stress tests.
• Align regulations more closely with the Basel III package: (i) adopt and gradually phase in
CCoB (2.5 percent of RWA for common tier 1 equity) for all banks; (ii) formalize regulation for
the D-SIBs, including publication of the methodology to identify D-SIBs, and introduce the
HLA capital surcharge for the D-SIBs; (iii) consider introduction of the CCyB for all banks and
implementation of the NFSR after a careful analysis.
• Use macroprudential policy more actively through the more flexible use of parameters in
the existing tools (leverage ratio, dynamic provisioning requirement, or risk weights) and
adoption of additional measures, e.g. the direct limits on the LTV, DTI and DSTI ratios.
• Develop a tighter financial safety net by establishing emergency liquidity assistance and the
deposit insurance scheme and improve the bank resolution framework.
• Enhance regulatory framework and coordination: (i) extend mandate of the FCC and
strengthen its structure by expanding its membership; (ii) enhance role of MEF in the current
coordination, crisis management and resolution framework; and (iii) adopt the regulatory
sandbox for fintech.

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Annex 1. Recent Developments

Table A1.1. Panama: Entries and Exits in Panama International Banking Center
Year Actions Name of bank License Country Dates of operation Comment
Onshore Banks with General License (GL)
2014 Exit Bank Leumi Le-Israel, B.M GL Israel Oct. 1982 - Aug. 2014 VL [1]
2014 Entry Canal Bank S.A. (BMF) GL Panama Since Oct. 2014 New license
Merged with BAC
2014 Merge Banco BAC de Panamá, S. A GL Colombia May 1983 - Nov. 2014 International
Bank, Inc.
Acquisition by St.
2015 Merge Produbank (Panamá), S.A. GL Ecuador Apr. 2006 - Jun. 2015 Georges Bank &
Company, Inc.
Reorganization,
shares transfer (70
2016 Exit Banco Universal, S.A. GL Panama Dec. 1994 - Aug. 2016
percent) to Canal
Bank S. A.
Seizure of control,
reorganization
2016 Exit Balboa Bank & Trust Corp GL Panama May 2019 - Aug. 2018 and sale to
Corporación BCT,
S.A. (Costa Rica)
Banco Panameño de la Acquisition by
2019 Exit GL Panama Apr. 1981 - May 2019
Vivienda, S.A. Global Bank
2016 Entry Bi-Bank, S.A. GL Guatemala Since Jan. 2016 New entry
2017 Entry Atlas Bank (Panamá), S.A. GL UAE Since Oct. 2017 New entry
Offshore Banks with International License (IL)

2014 Exit ES Bank (Panamá), S.A. IL Portugal Mar. 2002 - Jun. 2014 Forced liquidation
2016 Entry BPR BANK, S.A. IL Dom. Rep. Since Jun. 2016 New entry
2016 Exit Scotiabank Perú, S.A.A. IL Peru Sep. 2006 - Dec. 2016 VL, res. 188-2015
2018 Exit BSI Bank (Panamá), S.A. IL Switzerland Feb. 2014 - Mar. 2018 VL, res. 122-2017
Banco Corficolombiana
2018 Exit IL Colombia Dec. 204 - Oct. 2018 VL, res. 46-2018
(Panamá), S.A.
Banco Santander (Panamá),
2019 Exit IL Spain Aug. 1973-Dec. 2018 VL, res. 240-2017
S.A.
Sale and license
cancellation (res.
2019 Exit International Union Bank, S.A. IL Venezuela Nov. 1981-Aug. 2019
80-2018, 181-
2019)
Offshore Banks with Representative License (RL)
2014 Entry Banco Etcheverría, S.A. RL Spain Since Aug. 2014 New entry
2014 Entry SAXO BANK (PANAMÁ), S.A. RL Denmark Since Nov. 2014 New entry
Bank of Saint Lucia
2015 Entry RL Saint Lucia Since Aug. 2015 New entry
International Ltd.
2015 Entry UBS SWITZERLAND AG RL Switzerland Since Dec. 2015 New entry
2016 Exit Mizrahi Tefahot Bank, Ltd RL Israel Dec. 2008-May 2016 VL, res. 10-2016
2016 Exit SAXO BANK (PANAMÁ), S.A. RL Denmark Nov. 2014 - Dec. 2016 VL, res. 199-2016
2017 Exit Bank Hapoalim B.M. RL Israel Jan.1982 - Apr. 2017 VL, res 012-2017
2017 Exit Credit Suisse RL Switzerland Dec. 2015 - Apr. 2017 VL, res 21-2017
Banco de la Provincia de
2017 Exit RL Argentina Jan 1982-Nov.2017 VL, res 202-2016
Buenos Aires
2019 Exit Banco Do Brasil, S.A. RL Brasil Sep. 1973-Apr. 19 VL, res 163-2018
Sources: Superintendency of Banks of Panama and IMF staff calculations.
[1] VL stands for “voluntary liquidation”

PANAMA
Table A1.2. Panama: Structure of the International Banking Center

2015 2017 2019
Onshor Offshor Total Onshor Offshor Total Onshor Offshor Total
Number of banks 48 45 93 49 38 87 45 33 78
Total assets 98.5 20.0 118.5 101.4 18.3 119.7 107.9 17.0 125.0
Total 71.3 12.5 83.8 73.0 11.2 84.3 76.5 11.6 88.1
Deposit
Intern 48.9 0.1 49.0 52.4 0.0 52.4 55.7 0.1 55.8
s
Extern 22.4 12.4 34.9 20.6 11.2 31.8 20.8 11.4 32.2
Credit Total 61.6 10.8 72.4 65.3 10.0 75.4 68.3 7.8 76.1
portfoli Intern 44.7 0.0 44.7 50.9 0.0 50.9 54.0 0.0 54.0
o net of Extern 16.9 10.8 27.7 14.4 10.0 24.4 14.3 7.8 22.1
Equity capital 9.9 2.4 12.3 11.6 2.7 14.3 12.6 3.2 15.9
Sources: Superintendency of Banks of Panama and IMF staff calculations.
Table A1.3. Panama: Sample Rating Base of CAMEL Components

Components Rating 1 Rating 2 Rating 3 Rating 4 Rating 5
Capital adequacy (CAR) >=12 9-11.99 8-8.99 7-7.99 <=6.99
Asset quality NPLR <=1.5 1.51-2.5 2.6-3.5 3.6-5.5 >=5.6
Management efficiency (NER) 40-49.99 50-59.99 60-69.99 70-75 >=75
ROA >=1 0.9-0.8 0.35-0.7 0.25-0.34 <=0.24
ROE >=22 17-21.99 10-16.99 7-9.99 <=6.99
Liquidity ratio 1 <=55 56-62.99 63-68.99 69-74.99 >=75
Liquidity ratio 2 >=50 45-49.99 38-44.99 33-37.99 <=32
Source: Khaled A. Zedan and Ghassan Daas (2017).
Text Box A1.4. Panama: SBP Methodology for the Financial Stability Map
Dimension Indicators Used Additional Indicators for Consideration
Macro- Output gap, inflation rate, unemployment
economic GDP growth rate, public debt to GDP; primary balance to
risks GDP; sovereign EMBIG spreads; IMAE
Current account balance to GDP; gross
External foreign assets of banking sector to GDP;
Current account; ratio of exports to imports
risks volatility index (VIX); gross FDI inflows as a
share of GDP; change in FDI as share of GDP
Percentage deviation from the trend for the
domestic credit from banks, domestic credit
Local loan portfolio at risk1/ as a share of total
Credit risks from non-banks, and house prices;
local portfolio; growth of local loan portfolio
percentage change in the bank domestic
credit to GDP
Solvency Difference between ratio of interest income to
and income generating assets and ratio of interest Tier 1 capital to RWA; results from stress
profitability expense to expense generating liabilities2/; tests
risks capital adequacy index; return to equity (ROE)
Ratios of local loan portfolio to local deposits, Private domestic credit to private domestic
Liquidity
deposits (excluding related parties) to liquid deposits; liquid assets to short-term
risks
assets, and interbank funds to liquid assets3/ liabilities; LCR; results from stress tests
Source: Superintendency of Banks of Panama.
1/ Portfolio at risk includes loans classified in categories special mention, subnormal, doubtful and unrecoverable.
2/ Income generating assets include deposits in banks, loans and investments. Expense generating liabilities include deposits and obligations.
3/ Liquid assets include cash and cash equivalent, interbank deposits, and negotiable investments available for sale.

PANAMA
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Web of Macro-Financial Linkages”. International Monetary Fund. Working Paper 14/99.
Dehesa M. 2006. “Public Banks in Panama”. IMF. Selected Issues Paper 2006/03, pp. 60-68.
Demirguc-Kunt, A., Karacaovali, B., and L. Laeven. 2005. “Deposit Insurance Around the World: A
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economy/2018/july/abcs-camels
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https://www.unescap.org/sites/default/files/E-Government%20Survey%202018_FINAL.pdf
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Zedan K.A. and D. Ghassan. 2017. “Palestinian Banks Analysis Using CAMEL Model” International
Journal of Economics and Financial Issues, 2017, 7(1), 351-357

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MACROPRUDENTIAL POLICY IN PANAMA:

IMPLICATIONS FOR THE REAL ESTATE MARKET 1
A. Introduction
1. Residential real estate prices have been rising in Panama City, against the backdrop of
strong economic growth and interests from foreign buyers. Anecdotal evidence and private
sector surveys feature a continued increase in property prices in Panama’s capital city during the first
half of 2019, despite a brief moderation during the same period in 2018. At the same time,
commercial banks’ residential mortgage lending grew by an average annual rate of 11.7 percent
over the last 7 years. As a result, household indebtedness is on the rise. In Panama City, households’
exposure to mortgage debt accounted for around 96 percent of income in mid-2019 compared to
69.6 percent of income in 2012. 2
2. This note presents an analysis of the residential real estate market—with focus on
Panama City—and its implications for macroprudential policies. The evolution of real estate
prices is of particular interest to policy makers but assessing the sustainability of property prices is a
challenging task given the difficulty in assessing ex ante the presence of property price “bubbles”
(i.e., a prolonged rapid growth in prices followed by a sudden crash). This paper addresses the
following questions:
• How have residential property prices, mortgage lending, and household debt evolved in recent
years?
• Are residential real estate prices showing signs of "overheating"?
• Have there been changes in bank mortgage lending practices?
• What macroprudential measures could be used to mitigate property price risks?
3. A thorough analysis of the housing market in Panama is challenging in view of limited

availability of data and time series. At present, formal price indices for nationwide residential and
commercial real estates are not available. Consumer and business sentiment indicators which are
often used to gauge the private sector outlook on the real estate market, the volume of residential
dwellings that provides information on housing supply, and transactions by foreign buyers are also
unavailable. To work around these data limitations, this analysis uses the residential property price-
to-income ratio in Panama City published by Numbeo based on market surveys as a proxy for
residential property prices. In addition, internet search activity extracted from Google Trends is used
as a proxy for foreigners’ interest in Panama City’s real estate. Given these challenges, the caveats
1
Prepared by Julian Chow (WHD).
2
Based on data from Numbeo which defines mortgage as percentage of income as a ratio of the actual monthly cost
of the mortgage to take-home family income.

PANAMA
underpinning this analysis must, in particular, be considered to ensure accurate interpretation of the
findings. The results presented herein should be interpreted as early signals of possible risks, and as
a guide to the areas where further data collection would be useful to support surveillance and
further studies.
B. How Have Property Prices, Mortgage Lending, and Household Debt

Evolved Recently?
4. Residential property prices in Panama City have been rising, precipitated by strong
economic growth and interest from foreign buyers. While Panama does not have a formal real
estate price index, private sources—such as Numbeo—which derive their data based on market
surveys suggest continued optimism in the capital Panama City. For example, the ratios of
residential real estate price-to-income and price-to-rent had risen by 52 percent and 34 percent,
respectively, from 2012 to 2019, although they appeared relatively low compared to major cities in
neighboring countries, based on data from Numbeo data. 3 According to Global Property Guide,
foreign buyers were pushing up property prices in Panama, as average dwelling sales price surged
by 21 percent from 2015 to 2017 in Panama´s metropolitan area. Major foreign buyers originated
from the United States, Europe, Canada, and Latin America. It is worth noting that over the last five
years, Panama’s economy grew at an average annual rate of 5 percent, more than eight times the
average annual growth rate of Latin American countries (at 0.6 percent). 4
Figure 1. Panama: Household Mortgage Debt Indicators

Panama City: Household Mortgage Debt Panama City: Household Mortgage Debt
(In percent of income) (In percentage of income, mid-2019)
110 350
105 300
100 250
95
200 Average
90
150
85
80 100
75 50
70
Gu at em ala City,
Mexico City, M exico

Panama Cit y, Panama
Quito, Ecuador
Montevideo, Uruguay
Asun cion, P araguay
Domin ican Republic
Bogota, Colombia
Santiago, Ch ile
Rio de Janeiro, Brazil

Lima, Peru
Santo Domin go,

Gu at em ala
65
60
Jun 2014
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2019
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Jan 2017
Jan 2018
Jan 2019
Source: Numbeo.
3 Numbeo defines price to income ratio as the ratio of median apartment prices to median familial disposable
income, expressed as years of income (lower is less risky). Price to rent ratio is computed as the average cost of
ownership divided by rent (lower values suggest that it is better to buy rather than rent, and vice versa).
4 Latin American countries comprise Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and
Venezuela.

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5. Strong demand for residential properties had

Banking Sector: Total Residential Mortgage Loans
led to an increase in mortgage lending by (In percent of total loans)
commercial banks and higher household mortgage 35

34
debt. In line with the increase in property prices in 33
Panama City, commercial banks’ residential mortgage 32
loans grew at an average annual rate of 11.7 percent, 31

30
from 2012 to 2019. During this period, the share of 29
residential mortgage loans to total loans increased 28
gradually, from 28 percent to 34.5 percent. As a result,
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
household exposure to mortgage debt rose significantly Source: Superintendency of Banks.
in Panama City, amounting to 96 percent of income in
2019, based on data from Numbeo. 5 While this ratio pales in comparison with neighboring capital
cities, it accounts for close to the full amount of disposable income.
Figure 2. Panama: Real Estate Indicators

Panama City: Real Estate Price to Income Ratio Panama City: Real Estate Price to Rent Ratio
(2012 to Q2 2019) (2012 to Q2 2019)
14 11.5
11
13
10.5
12 10
9.5
11
9
10 8.5
8
9
7.5
8 7
Jun 2014
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2019
Jun 2014
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2019
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Jan 2017
Jan 2018
Jan 2019
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Jan 2017
Jan 2018
Jan 2019
Panama City: Real Estate Price to Income Ratio Panama City: Real Estate Price to Rent Ratio
(Mid-2019) (Mid-2019)
25 30
23
21 25
19 Average
17 Average 20
15
13 15
11
9 10
7
5 5
Guatem ala City,
Guatem ala City,

Mexico City, Mexico
Mexico City, Mexico

Panama City, Panama
Panama City, Panama

Quito, Ecuador
Montevideo, Uruguay
Quito, Ecuador
Montevideo, Uruguay
Asuncion, Paraguay
Asuncion, Paraguay
Dominican Republic
Dominican Republic
Bogota, Colombia
Bogota, Colombia
Santiago, Chile
Santiago, Chile

Lima, Peru
Lima, Peru
Santo Domingo,
Santo Domingo,
Guatem ala
Guatem ala
Source: Numbeo.
5
Numbeo defines mortgage-to-income as a ratio of the actual monthly cost of the mortgage to take-home family
income.

PANAMA
C. Are Residential Real Estate Prices Showing Signs of "Overheating"?
6. It is difficult to know if house prices have deviated significantly from “fundamentals”.

The definition of “fundamental” is model-specific and thus, the assumptions that underpin the
model would need to be taken into consideration in interpreting the results (Annex I). In addition,
data limitations are caveats that must be borne in mind:
• Absence of a publicly available nationwide real estate price index. 6 The residential
property price-to-income ratio computed by Numbeo, based on market surveys, is used as a
proxy for the trend in real estate prices. The annual series for this ratio begins in 2011. From
2014 onwards, Numbeo provide semi-annual data.
• Unavailability of certain real estate market-related indicators. Panama does not produce
statistics on the volume of houses and dwelling, detailed volume of real estate loans, real estate
purchases by foreigners (volume and value), and consumer and business sentiment indices
which are, among others, important determinants of the demand and supply of housing.
7. A residential property price model could be derived based on available economic

variables and noting the caveats above (Annex II). A baseline predictor for residential property
price-to-income ratio in Panama City is constructed using quarterly data from Q4-2013 to Q4-2018.
It is used to predict the residential property price-to-income ratio from Q1-2019 to Q2-2019 (out-
of-sample) which are then compared with the actual observed ratios.
8. The results indicate a significant

Property Price-to-Income Ratio: Actual vs.
deviation between the actual real estate prices Predicted
14
and the predictor in the “out-of-sample”
13
period. Panama City’s real estate price-to-income
12
ratio continued to increase stably since from
Q2-2018 to Q2-2019, departing from the predictor 11
Actual
which suggests a reversal starting from end-2018. 10 Out of
Predictor sample
From Q1-2019 to Q2-2019, the average difference 9
between the actual and predicted ratios is around 8

Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
1.5 percentage points, or 2.4 standard deviations.

Hypotheses tests based on t-distribution suggest
that the deviations between the observed price-
to-income ratios and the predictor are statistically significantly in Q1-2019 and Q2-2019, at the 5
percent level (Annex II).
9. The decline in the predictor in the “out-of-sample” period could be attributable to

moderating economic growth and rising financing costs. A decomposition of the explanatory
variables suggests that real GDP growth and interest rate jointly explained 56 percent of the
6
While the authorities have created a price index of new housing (Indice de Precios de Vivienda Nueva (VNPI)), which
includes Panama City and San Miguelito, it is used for internal monitoring and is not publicly available.

PANAMA
variations in the property price-to-income ratio.

Contribution of Explanatory Variables 1/
While economic growth remained resilient, real (In percent)
GDP growth moderated by 1.1 percentage points 100
from Q1-2018 to Q1-2019. During the same 80 Foreigners'

period, banks’ weighted average lending rate rose interest
60
51 basis points. A confluence of these two factors Interest rate
precipitated a decline in the predicted price-to- 40

Real GDP growth
income ratio, by 2 points, from Q4-2018 to Q1-
20
2019, departing from the observed actual price-to- Population
income ratio which remained on a stable 0
Source: IMF staff calculations.
appreciation trajectory, rising by 0.2 points during 1/ Computed based on partial R-squared and assuming that
the period. the four variables are the only explanatory variables.
Figure 3. Panama: Economic Growth and Commercial Banks’ Lending Rates

Real GDP Growth Weigthed Average Bank Lending Rate
(In percent, y/y) (In percent)
7 6.8
6 6.6
Out of
5 sample 6.4
4 6.2
Out of
3 6 sample
2 5.8
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Sources: Superintendency of Banks; National Statistics and Censuses Institute (INEC); Haver Analystics.
10. Continuous surveillance of developments in the real estate market is important. The
statistically significant divergence in the structural relationship between the observed price-to-
income ratio and the predictor could indicate three possibilities: (i) positive expectations of a future
rebound in economic growth and lower mortgage rates 7, underpinning the resilience in housing
market; (ii) disequilibrium between current property prices and fundaments which could potentially
lead to a correction in prices in the future; and (iii) "missing variables" in the model. Given that the
R-squared of the regression is high, there is a fair chance that possibility (i) or (ii) could occur. If
possibility (ii) materializes and residential property prices continue to increase—thus exacerbating
the disequilibrium—then a destabilizing "bubble" could build up over time. To mitigate such risks, a
prudent approach would be to strengthen the monitoring of developments in the real estate
market, household debt and bank lending practices, and at the same time, fortify the
macroprudential policy toolkits to stand ready to tighten them when necessary.
7
First time buyers of new homes receive preferential mortgage interest rate (two percentage points off the market
rate) for residential real estate valued at US$180,000 and below.

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11. It is also important to identify the “missing variables” that could explain the
divergence between the two indicators. Unexplained increases in real estate prices may not
necessarily be a source of concern if they are driven by expected improvements in economic
conditions in the future (i.e., strong growth that leads to higher property prices), lower interest rates,
or improved liquidity of the housing market (Annex I). On the contrary, if the increase in prices is
related to moral hazard in lending practices, then macroeconomic and financial stability could be at
risk. This study should ideally be extended with alternative econometric models that include the
following explanatory variables:
• Variations in property taxes.
• Changes in the supply of houses. Useful indicators include construction and residential permits.
• Distribution of income and household debt across different population groups.
• Business and household sentiment.
• Real estate purchases by foreigners (volume and value).

Extending this study would require further efforts by the authorities to collect these data, which
would also contribute towards enhancing surveillance.
D. Have There Been Changes in Bank Mortgage Lending Policies?
12. Over the last seven years, residential

Growth in Commercial Banks' Total Loans and
mortgage loans grew at a faster pace compared to Residential Mortgage Loans
(In percent change, y/y)
total commercial bank loans. From 2012 to 2019, 18
commercial banks’ residential mortgage loans grew by 16
Total Residential
14
an average annual rate of 11.7 percent, higher 12 mortgage
10
compared to the average annual rate of total loans, at 8
9.4 percent. The rapid growth in housing loans led to 6
4
an increase in the share of commercial banks’ 2
0
residential mortgage loans to total loans from 28.9
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
June 2019
percent in 2012 to 34.5 percent in 2019.
13. A benchmark for the growth in residential Source: Superintendency of Banks.
mortgage lending was constructed following the methodology developed in Section C. A

predictor was constructed from Q4-2008 to Q4-2018. It was then contrasted with the actual growth
of mortgage loans for the period from Q1-2019 to Q2-2019 to ascertain whether there were any
structural breaks between the two series (Annex III).
14. The results indicate that growth in residential mortgage loans was slightly stronger
than the predictor in the first half of 2019. Residential mortgage loans grew 5.3 percent (Y/Y) in
Q2-2019, slightly higher compared to the predictor, at 3.4 percent (Y/Y). The average divergence
between the actual and the predicted mortgage growth rates during the first half of 2019 is 1.8
percentage points,

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accounting for around 0.9 standard deviations above

Growth in Housing Loans: Actual vs. Predicted
the mean. Hypotheses tests based on t-distribution (In percent change, y/y)
suggest that the deviations in Q1-2019 and Q2-2019 30
are not statistically significantly, at the 5 percent level 25 Actual
(Annex III). This suggests that it is too early to 20 Predictor Out of
sample
conclude that banks’ lending practices have changed 15
as more observations would be needed. The 10
resilience in banks' mortgage lending could be 5
driven by expectations of a recovery in economic 0
activities as in the case of the price-to-income ratio
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
before. The deviation could also possibly reflect
Source: IMF staff calculations.
“missing variables”. That said, the divergence
particularly in Q2-2019 reinforces the need for continuous monitoring and surveillance of the real
estate market, including banks' underwriting standards, to safeguard financial and macroeconomic
stability.
15. The predictor showed relatively slower growth rates during the first half of 2019 due
to a moderation in economic growth and higher mortgage rates. A decomposition of the
explanatory variables suggests that nominal GDP growth (as a proxy for income levels) and
mortgage rates jointly explain 55 percent of the variations in residential mortgage loan growth.
During the first half of 2019, nominal GDP grew by an average 2.8 percent (Y/Y), slower compared to
4.6 percent (Y/Y) during the same period in 2018. Banks’ mortgage rate increased to 5.81 percent in
2019, from 5.56 percent in 2018.
Figure 4. Panama: Contribution of Explanatory Variables and Commercial Banks’

Mortgage Lending Rates
Contribution of Explanatory Variables 1/ Mortgage Rate
(In percent) (In percent)
100 6
Mortgage rate 5.8

80
Population growth
60 5.6
Growth in
40 construction loans 5.4 Out of
Nominal GDP sample
20 growth 5.2
0 5
Sep-15
Sep-16
Sep-17
Sep-18
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-15
Dec-16
Dec-17
Dec-18
Sources: Superintency of Banks (SBP), and the National Statistics and Censuses Institute (INEC); Haver Analystics.
1/ Computed based on partial R-squared and assuming that the four variables are the only explanatory variables.

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E. What Are the Macroprudential Measures to Mitigate Housing Risks?
16. At present, Panama has put in place various macroprudential policies. The
Superintendency of Banks (SBP) implemented dynamic provisions rule (DPR) since June 30, 2014 as
part of general rule for provisioning and credit risk management. The DPR is part of regulatory
capital but cannot be included in the calculation of capital to meet the regulatory minimum (i.e.,
banks need to maintain the DPR in addition to regulatory minimum of 8 percent). In addition, capital
requirements are imposed on lending to household and corporate sectors.
Box 1. Sectoral Capital Requirements with Effect from July 1, 2016

Household Sector Corporate Sector
• 35 percent for main home if the loan-to- • 50 percent if pledged by commercial real
value (LTV) ratio is less than 80 percent estate which is used as collateral with an
with the appraisal completed in the last 3 LTV ratio less than 60 percent and an
years. appraisal conducted within the last 3
years; or if pledged by residential
• 50 percent for main home if the LTV ratio
properties which are used as collateral
is between 80 and 100 percent, and
with an LTV ratio less than 70 percent and
appraisal conducted within 10 years.
an appraisal conducted within the last 3
• 50 percent for main home if the LTV ratio years.
is less than 80 percent, and appraisal was
conducted more than 3 years ago.
• 50 percent for mortgages on second
homes, provided the LTV ratio is not
greater than 80 percent, and the appraisal
was conducted within the last 5 years.
• 100 percent for all other mortgages.
Source: IMF Macroprudential Policy Survey
17. The macroprudential toolkit could be expanded to include limits on loan-to-value

(LTV) ratios, and caps on debt-service-to-income (DSTI) or loan-to-income (LTI) ratios. 8 These
measures would complement the existing sectoral capital requirements. Box 2 shows examples of
various macroprudential instruments and useful indicators to identify when to tighten the
macroprudential measures.
18. A wide range of indicators should be used to assess the need for policy action,
especially the growth of mortgage loans and house prices. These two indicators are core
indicators for vulnerabilities in housing markets, since they jointly provide powerful signals of a
procyclical build-up of systemic risk. 9 Deviations of house prices from long-term trends have proved
useful in predicting financial stress (Borio and Drehmann, 2009); and house price-to-rent and house
price-to-income ratio are often used as measures of over- or under-valuation of house prices. In
addition, other indicators should be closely monitored, such as: (i) the average and the distribution
8
For further details, refer to IMF, 2014a and IMF, 2014b
9 Research shows these indicators together can predict a crisis as early as two to four years in advance (IMF, 2011a).

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of LTV, DSTI, and LTI ratios across new loans over a period and outstanding loans at a given point in
time; (ii) the share of foreign currency denominated mortgage loans or interest-only mortgage
loans; and (iii) housing price growth by regions and types of properties.
Box 2. Macroprudential Instruments to Mitigate Risks in the Household Sector and

Indicators to Identify When to Tighten
Instruments Core Indicators Additional Indicators

• Broad-based • Credit/GDP gap • Growth in credit/GDP
(Capital) tools
• Credit growth
• Countercyclical
• Asset price deviations from
capital buffers
long-term trends
• Sectoral capital
• Under-pricing of risk in
requirements
financial markets (low
volatility/spreads)
• DSTI ratios
• Leverage on individual loans or
at the asset level
• Increasing wholesale funding
ratio (noncore funding)
• Weakening exports and
resulting current account
deficits
• Household tools • Increasing house prices (nominal • Increasing house prices by
and real growth) region and by types of
• Limits on LTV ratios
properties
• House price-to-rent and house
• Caps on DSTI or LTI
price-to-disposable income ratio • Deteriorating lending standards
ratios
• Household loan growth • High LTV ratio
• Increasing share of household loans • High LTI ratio
to total credit
• High DSTI ratio
• Share of FX loans and interest
only loans
Sources: IMF, 2014a and IMF, 2014b
19. Sectoral tools should be activated or tightened when multiple indicators point to
rising systemic risk. A single signal, or mixed signals from multiple indicators, may not be sufficient
for action. For example, strong growth in mortgage loans without house price growth may simply
indicate improving housing penetration rather than an increase in risk. Conversely, a sharp increase
in house prices, without strong mortgage loan growth, may reflect a shortage of house supply
requiring structural policies to improve supply rather than a macroprudential response.

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20. Policymakers should take a gradual approach when tightening or introducing sectoral
tools. When several indicators show signs of a gradual build-up of risk in the housing sector,
policymakers should first intensify supervisory scrutiny and step up communication. As a next step,
less distortionary sectoral capital requirements may be tightened to build additional buffers. 10
Tighter limits on LTV and/or DSTI ratios can follow if these defenses are not expected to meet policy
objectives (Figure 5 below provides country examples). LTV and DSTI caps should always be
imposed on the flow of new household loans. Otherwise, it would force some existing high LTV or
DSTI borrowers to provide more collateral or repay part of their loans, leading to a possible distress.
Figure 5. Panama: Limits on LTV and DSTI Ratios and Number of Countries at
Each Range, 2014
Limits on LTV Ratios Caps on DSTI Ratios
(In percent) (Number of countries)
120 8
100 7
80 6
60 5
40 4
20 3
0 2
Lebanon
Singapore
Sweden
Colombia
Finland
Norway
Korea
Brazil
Bulgaria
Thailand
Chile
Malaysia
Canada
India
Indonesia
Latvia
Netherlands
Ireland
Romania
China
Hungary
Turkey
Hong Kong SAR
Israel
0
30-40 % 40-45 % 45-50 %

Note: Observed limits on LTV ratios are below 80 percent in more than half of 51 sample countries, and Most countries with caps on DSTI
ratios have imposed 40–45 percent as the limit (seven out of 13 countries), and four countries restrict it to be below 35 percent.
21. As sectoral tools work via a range of transmission channels, combining them can
reinforce their effectiveness and mitigate the shortcomings of any single tool. A higher risk
weight forces lender to hold extra capital to buffer unexpected losses and restrains credit growth as
lending rates increase due to higher funding costs. Limits on LTV ratios cap the size of a mortgage
loan relative to the appraised value of a house, while caps on DSTI and LTI ratios restrict the size of
debt service payments to a fixed share of household incomes. They can complement each other, for
example when house prices increase, LTV limits may become less effective but DSTI or LTI caps
continue to restrict credit to household income. The DSTI caps also enhance the effectiveness of LTV
limits by containing the use of unsecured loans to meet the minimum down payment. In a low
interest rate environment, DSTI caps complement LTV limits in containing increases in household
leverage, thus help mitigate defaults when interest rates eventually rise. These caps can break the
procyclical feedback between credit and house prices, and can also reduce speculative demand by
containing expectations of future house prices. DSTI caps work as an automatic stabilizer—
becoming more binding when house prices grow faster than disposable income, thereby helping to
smooth credit booms (Figure 6).
10 See the BCBS consultative document (http://www.bis.org/bcbs/publ/d307.pdf) proposing a range of risk weights
(from 25 to 100 percent) driven by LTV and DSTI ratios.

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Figure 6. Panama: Transmission Mechanism of Three Sectoral Macroprudential Instruments
Risk Assessment Actions Transmission channels Intended outcomes
Credit supply channel
Banks raise more capital

Tighten sectoral capital
→ Funding/lending rate ↑
requirements
Sectoral risk weights ↑

Resilience channel
LGD floors ↑
Unsustainable Capital buffers ↑
increase of Capital against unexpected Stabilization of core
core indicators losses ↑ indicators
(feedback loops) Probability of default ↓
Loss given default ↓ • Household loan growth ↓
Household loans ↑ Tighten limits • Share of systemically risky
Unsecured loans ↑ on LTV ratios type of loans ↓
Mortgage loans ↑ Anti-default channel • House prices ↓
• Price-to-Rent and
Maximum LTV ratios ↓
House prices ↑ Minimum down payment ↑ Price-to-Income ratio
Price-to-rent ↑ → Default incentives ↓ goes back to its trend
Price-to-income ↑
Expectation channel
Tighten limits Anticipating decrease of
on DSTI ratios capital gains or profits
→ Lenders’ deleveraging
Maximum DSTI ratios ↓ → Borrowers’ speculative
incentives ↓
Credit Demand channel

(automatic stabilizer)
Borrowing constraints bind

→ Loan availability ↓
22. Expanding the regulatory perimeter would contain leakages. An increase in credit by
domestic nonbank financial institutions—such as credit cooperatives—may render the sectoral tools
ineffective if they are applied only to the domestic banking sector. Policymakers would need to
expand the regulatory perimeter to these nonbank financial institutions through inter-agency
cooperation. 11
When to Loosen Macroprudential Policies?
23. Sectoral tools can be loosened to contain feedback loops between falls in credit and
house prices during housing busts. A housing bust can result in a credit crunch that puts further
downward pressure on house prices. Strategic default, fire sales and contraction in the supply of
credit can create negative externalities beyond the parties involved in financial contracts (IMF,
2011b; Geanakopolos, 2009; and Shleifer and Vishny, 2011).
24. Indicators that inform the tightening phase could be used for informing decisions to
loosen macroprudential policies when they turn in the opposite direction. Fast-moving
indicators that could guide such decisions include house transaction volumes and spreads on
household loans. A softening housing market alone is not sufficient to justify a loosening of
macroprudential measures. Evidence of a systemic stress is vital, such as simultaneous decline in
prices and credit, and an increase in non-performing loans or defaults. In such circumstances,
loosening macroprudential policies would reduce stress in the housing market.
11
In Panama, commercial banks are regulated by the Superintendency of Banks; insurance companies are regulated
by the Superintendence of Insurance and Reinsurance; and cooperatives are supervised by the Panamanian
Autonomous Institute for Cooperatives.

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25. The loosening of macroprudential policies needs to respect certain prudential minima
that could safeguard an appropriate degree of resilience against future shocks. If large
additional buffers have been built during the tightening phase, they can be released to avoid a
credit crunch without jeopardizing banks. However, the relaxation should not go beyond a
“permanent floor”, i.e. level considered safe in downturns. Policymakers should also communicate
clearly that a tightening can be followed by a relaxation so that market participants do not take an
adverse view of the relaxation during downturn (BIS, 2012).
26. A loosening of these tools can be effective but may have limited effects when it is
“pushing on a string.” Even if policymakers loosen sectoral instruments, banks may be reluctant to
provide credit due to increased risk aversion or capital constraints, and may apply more stringent
lending standards than the regulatory thresholds. Potential borrowers may be reluctant to enter the
housing market while prices are still falling. Nonetheless, the relaxation would still be useful in
containing the spillback from falling prices and credit.
27. Housing demand and house price growth financed directly by foreigners may thwart
the effectiveness of macroprudential tools. In these cases, higher stamp duty or capital gains tax
may be useful (e.g. Hong Kong SAR and Singapore).
F. Conclusion and Policy Implications
28. Residential real estate prices in Panama City and more generally, commercial banks’
mortgage lending, appear to be growing at a faster pace compared to their suggested
econometric models during the first half of 2019. These results are suggestive of potentially
important shifts in the dynamics of property prices, and therefore, should be further investigated. It
would be useful to identify the “missing variables” that could explain the relatively stronger
residential property price-to-income ratios since early 2019 as unexplained increases in real estate
prices might not necessarily be a worrying concern, particularly if the price increase was driven by
improved liquidity of the housing market. On the contrary, if the growth in prices were related to
heightened moral hazard in lending practices, then risks to financial stability could emerge. This
analysis also finds that it is too early to conclude that banks’ lending practices have changed
although some signs of a departure between mortgage loan growth and the model appeared in Q2
2019.
29. It would be prudent to treat the findings as early signals of possible risks as well as a
guide the areas where further data collection would help support surveillance and additional
analysis. The divergences—in Panama City’s residential real estate price-to-income ratio and its
predictor and in the growth between commercial banks’ mortgage loan and its predictor—could
indicate early signs of risks. As such, it would be prudent to strengthen the monitoring of the
housing market, household debt and bank lending practices. While Panama has put in place various
macroprudential policies at present, the country’s overall macroprudential framework could be
further fortified, including with more effective toolkits that the SBP could deploy, for early
intervention, to mitigate risks to macroeconomic and financial stability. If lax underwriting standards
are detected, intrusive and tighter prudential supervision, including appropriate enforcement

PANAMA
actions, would be needed. It is also important to for the authorities to establish new data—including
formal real property price indices (residential and commercial) and real estate transactions by
foreigners (value and volume)—to help enhance surveillance and improve the accuracy of forecasts.
30. An extension of this study to include commercial real estate prices would strengthen
early warning signals. Panama’s optimistic economic growth and continued foreigners’ interests in
the property sector could spill over to the commercial real estate, potentially leading to a property
price bubble. Extending this analysis to the commercial real estate would require fresh efforts by the
authorities to gather new data, including establishing a commercial property price index. In the
same vein, continued efforts by the authorities to monitor and supervise banks, particularly in
underwriting standards, would help ensure no lax in the quality of real estate financing.

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Annex I. When Do Real Estate Prices Depart from

“Fundamentals”?
1. The question of when and whether real estate prices are disconnected with
“fundamentals” is a difficult question to answer.
2. Any definition of a “fundamental” is model-specific. A simple asset pricing model

would define the “fundamental” price of a house as the present discounted value of all future rents
that an investor receives (or avoids to pay) from owning the house. Expanding this model, in a
hypothetical country where individuals migrate inter-state to search for better jobs, the value
attached to the purchase of a house depends on how liquid the housing market is. In such a
scenario, liquidity is another determinant of “fundamentals” that influence house prices.
3. In another version of the pricing model, if house buyers are credit constrained, then
house prices might be lower than the present discounted value of rents. In this case, the extent
to which credit constraints are present and binding would also constitute a “fundamental”
determinant of house prices.
4. A somewhat more subtle scenario is when moral hazard is present in the market for
real estate lending. Moral hazard arises when the government provides “guarantees”—implicit or
explicit—to the banking sector. When these “guarantees” are present, the value of real estate would
be higher than in the case where there is no guarantee.
5. This leads to an important caveat: the definition of “fundamental” depends on the

choice of a model used and the variables that define the model. House prices may differ from
levels predicted using a certain definition of “fundamental”, but that same level of prices may be
perfectly explained when the definition of “fundamental” is expanded to include one or more
variables. Thus, to avoid confusion, this paper uses the expression “predictor” to be consistent with
the econometric nature of the analysis instead of “fundamental”.

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Annex II. Model: Residential Real Estate Price-to-Income
A. Model
1. Two models are considered, represented by the following equations:

• Model 1(a): Yi = αi + β1 X1,i + β2 X2,i + β3 X3,i + εi
• Model 1(b): Yi = αi + β1 X1,i + β2 X2,i + β3 X3,i + β4 X4,i + εi

where:
Yi = Residential property price-to-income ratio
X1,i = Real GDP Growth (in percent, Y/Y)
X2,i = Population (in thousands )
X3,i = Interest rate, based on commercial banks’ weighted average lending rate (in
percent per annum)
X4,i = Foreigners’ interest, based on internet searches using key words "Panama City
apartments" and "Panama City houses", based on Google Trends data (in
percent change, Y/Y)
αi = Constant
εi = Residuals
Variables Data Sources
Residential Property Price-to-Income Ratio Numbeo

Real GDP Growth IMF World Economic Outlook
Population United Nations (World Population Prospects 2019)
Interest Rate Superintendency of Banks
Foreigners’ Interest Google Trends
2. Model 1(a) is derived mainly on fundamental variables. The explanatory variables

comprise real GDP growth (proxy for income), population (proxy for demand for housing), and
weighted average lending rate (proxy for price of credit). 1 Quarterly data for price-to-income ratio
and population are derived using spline interpolation. 2
3. Model 1(b) augments Model 1(a) with online internet search activity. This model
expands Model 1(a) by including an additional explanatory on internet search activity as a proxy for
foreigners’ interest in real estate in Panama City, given that data on residential property purchases
by foreigners is not available. Specifically, data on online internet searches in the U.S. using
1 An alternative specification for the econometric model has also been explored with filtered real GDP growth, using
the Hodrick-Prescott (HP) filter to remove short-term fluctuations associated with business cycles. However, the
coefficient of this variable is not statistically significant.
2 The frequency of the source data for price to income ratio and population are semi-annual and annual, respectively.

PANAMA
keywords "Panama City apartments" and "Panama City houses" are extracted from Google Trends,
based on Internet Protocol (IP) address in the US. 3 The explanatory variable is derived by computing
year-over-year (Y/Y) change for each quarter to remove seasonal effects. Augmenting Model 1(a)
with data from internet searches improves the overall fit of the model, in line with recent findings
which show that online search queries can be extremely useful when information is fragmented or
missing. 4
Results
4. The predictor derived from the Regression Analysis with Panama City Real Estate Price-to-Income
regression provides a good in-sample Ratio as Dependent Variable
1/
fit. The estimated coefficients are all in the Model 1 (a) Model 1(b)
expected signs. Increases in real GDP Interest rate -3.0601 -3.3704

growth and population lead to increasing (0.69539) (0.64557)
real estate prices while rising interest rates Real GDP Growth 0.9251 0.9638
increases financing costs which reduce the (0.14211) (0.12989)
demand for housing—these are all in line Population 0.0133 0.0133
with empirical observations. In Model 1(b), (0.00137) (0.00124)
increasing foreigners’ interest on real Foreigners' Interest 0.0257
estate in Panama City—captured by (0.0118)
“Google Trends”—also contributes to Constant -27.8815 -26.0511
higher real estate price-to-income ratios, (5.06804) (4.66517)
reinforcing the suggestions that foreign R-squared 0.85507 0.8882

buyers were influencing property prices. Adjusted R-squared 0.82949 0.8602
Augmenting Model 1(a) with internet Durbin-Watson statistics 1.7190 1.8111
search activity also improves the overall fit, Period Q4,2013-Q4,2018 Q4,2013-Q4,2018
as the adjusted R-squared increases from Source: IMF staff calculations.

Note: Standard errors are in brackets. "Interest rate" refers to weighted aveage bank lending
83 percent to 86 percent. The coefficients rates, in percent per annum. Foreigners' interest is derived from "Google Trends", computed as
of all the explanatory variables are quarterly (Y/Y) change in internet searches using keywords "Panama City apartments" and
"Panama City houses".
statistically significant. The actual real 1/ All coefficients are significant at 1%, except for "Foreigners' Interest" which is significant at 5%.
estate price-to-income ratio and the

predictor are cointegrated, and no significant autocorrelation is detected. 5
3
Google is the largest global internet search engine, with a share of over 90 percent of search activity. The Google
Trends data—available since January 2004 on a monthly basis—aggregate individual search queries on G according
to terms, time, category and location based on the IP address from which the search is conducted. Stephens-
Davidowitz and Varian (2014) provide further details on the construction of the Google Trends data.
See Cevik (2020, forthcoming), Narita and Yin (2018), Carrieré-Swallow and Labbé (2013).
Based on Engel-Granger test for cointegration and Breusch-Godfrey serial correlation LM.oogle according to terms,
time, category and location based on the IP address from which the search is conducted. Stephens-Davidowitz and
Varian (2014) provide further details on the construction of the Google Trends data.
4 See Cevik (2020, forthcoming), Narita and Yin (2018), Carrieré-Swallow and Labbé (2013)
5 Based on Engel-Granger test for cointegration and Breusch-Godfrey serial correlation LM.

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B. Hypothesis Test: Are the Observed Price-to-Income Ratios Significantly

Different from the Predictor in Q1 2019 and Q2 2019?
Hypothesis:
Difference • Ho: (A)-(B) = 0
Actual (A) Predictor (B)
(A)-(B) • H1: (A)-(B) ≠ 0
12/31/13 9.15 9.48 -0.33
03/31/14 9.58 9.63 -0.04 Mean=0.1278; Standard deviation=0.5659; N=23
06/30/14 10.17 10.28 -0.11
09/30/14 10.95 10.73 0.22
12/31/14 11.51 11.42 0.09 For Q1 2019:
03/31/15 11.52 11.65 -0.13 • Test statistic, Zi = 2.32071
06/30/15 11.45 11.49 -0.04 • Critical value, tcrit,i =1.717, based on t-
09/30/15 11.78 11.80 -0.02 distribution with 5 percent significance level
12/31/15 12.30 12.40 -0.10 and n=23
03/31/16 12.67 12.48 0.18
06/30/16 12.74 12.56 0.18 Results: Reject Ho since Zi > tcrit,i. Therefore, the
09/30/16 12.52 12.04 0.48 observed price-to-income ratio is significantly
12/31/16 12.42 12.86 -0.44
different from the predictor in Q1 2019.
03/31/17 12.78 13.25 -0.47
06/30/17 13.29 12.88 0.41
09/30/17 13.51 12.81 0.70 For Q2 2019:
12/31/17 13.19 12.67 0.52 • Test statistic, Zj = 2.4745
03/31/18 12.28 13.00 -0.72 • Critical value, tcrit,j =1.717, based on t-
06/30/18 11.48 11.53 -0.05 distribution with 5 percent significance level
09/30/18 11.42 11.08 0.34 and n=23
12/31/18 11.73 12.45 -0.72
03/31/19 11.93 10.49 1.44
Results: Reject Ho since Zj > tcrit,j. Therefore, the
06/30/19 12.02 10.49 1.53
observed price-to-income ratio is significantly
different from the predictor in Q2 2019.

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Annex III. Model: Growth in Residential Mortgage Lending
A. Model
1. The model is represented by the following equation:

Zj = αj + γ1 V1,j + γ2 V2,j + γ3 V3,j + γ4 V4,j + εj
where:
Zj = Growth in commercial banks' residential mortgage loans (in percent, Y/Y)
V1,j = Mortgage rate (in percent)
V2,j = Growth in construction loans (in percent, Y/Y)
V3,j = Population growth (in percent, Y/Y)
V4,j = Nominal GDP growth (in percent, Y/Y)
αj = Constant
εj = Residuals
Variables Data Sources

Commercial Banks' Residential Mortgage Loans Superintendency of Banks
Mortgage Rate Superintendency of Banks
Construction Loan Superintendency of Banks
Population United Nations
Nominal GDP IMF
Results
2. The predictor derived from the regression Regression Analysis with Growth in Commercial
provides a good in-sample fit. The model is Bank's Residential Mortgage Loans (percent change,
constructed using four explanatory variables: y/y) as Dependent Variable 1/

Model 2
mortgage rate (as proxy for the cost of mortgage
Mortgage rate -2.1697
financing); growth in commercial banks’ lending to the (-1.1721)
construction sector (as proxy for expected future real Nominal GDP Growth(-3) 0.4161
estate volume); population growth (as proxy for (-0.0787)
demand for housing), and nominal GDP growth (as a Construction Loan Growth 0.1664
(-0.05)
proxy for income levels). The estimated coefficients
Population Growth 58.1337
are all in the expected signs and are statistically
(-20.0855)
significant. Positive growths in lending to the
Constant -81.9907
construction sector, population, and nominal GDP lead (-30.0053)
to an increase in residential mortgage loan growth, in
R-squared 0.8267
line with empirical findings. Conversely, higher Adjusted R-squared 0.8075
mortgage rates increase financing costs to borrowers, Durbin-Watson statistics 1.7
Period Q4,2008-Q4,2018
thus reduce the demand for mortgage loans. The Source: IMF staff calculations.
observed residential mortgage loan growth and the Note: Standard errors are in brackets.
1/ All coefficients are significant at 1%, except for mortgage rate which
predictor are cointegrated, based on Engel-Granger is significant at 10%.
test, and no significant autocorrelation is detected.

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B. Hypothesis Test: Are the Observed Growths in Banks’ Mortgage Loans

Significantly Different from the Predictor in Q1 2019 and Q2 2019?
Difference
Actual (A) Predictor (B)
(A)-(B) Hypothesis:
12/31/08 24.1945 23.7169 0.4776
• Ho: (A)-(B) = 0
03/31/09 21.7469 24.9239 -3.1770
06/30/09 23.2296 22.4292 0.8004 • H1: (A)-(B) ≠ 0
09/30/09 22.4664 18.2527 4.2136
12/31/09 12.6349 16.8207 -4.1858
03/31/10 14.3037 12.8940 1.4098 Mean= 0.0818; Standard deviation= 1.7762;
06/30/10 13.2520 11.8510 1.4010
N=43
09/30/10 12.4460 12.3930 0.0530
12/31/10 9.8015 11.1452 -1.3436
03/31/11 10.8363 10.0776 0.7587
For Q1 2019:
06/30/11 8.2025 9.0666 -0.8642
09/30/11 9.2615 11.7815 -2.5200 • Test statistic, Zi = 0.8593
12/31/11 13.3112 13.3233 -0.0121 • Critical value, tcrit,i =1.681, based on t-
03/31/12 13.0434 14.7209 -1.6774 distribution with 5 percent significance
06/30/12 14.1647 15.4451 -1.2805
level and n=43
09/30/12 15.4923 14.1887 1.3036
12/31/12 14.6096 13.4421 1.1674
03/31/13 14.3874 12.5026 1.8847
Results: Accept Ho since Zi < tcrit,i. Therefore,
06/30/13 16.4927 13.7215 2.7712
09/30/13 14.3703 14.5602 -0.1900 the observed growth in banks’ mortgage loans
12/31/13 13.4972 14.9920 -1.4949
is not significantly different from the predictor
03/31/14 14.6463 14.1575 0.4888
06/30/14 12.3592 13.9743 -1.6151 in Q1-2019.
09/30/14 13.8374 11.9943 1.8431
12/31/14 13.3359 11.7283 1.6076
03/31/15 14.4873 13.8951 0.5922 For Q2 2019:
06/30/15 14.6694 13.8239 0.8455 • Test statistic, Zj = 1.0292
09/30/15 15.6530 14.6087 1.0444
• Critical value, tcrit,j =1.681, based on t-
12/31/15 15.7568 13.1367 2.6201
03/31/16 15.4938 12.8705 2.6233
distribution with 5 percent significance
06/30/16 13.9156 12.7923 1.1232 level and n=43
09/30/16 12.4434 12.8423 -0.3989
12/31/16 12.3627 12.1955 0.1673
03/31/17 10.2272 11.8929 -1.6657 Results: Accept Ho since Zj < tcrit,j. Therefore,
06/30/17 10.1764 11.8208 -1.6444 the observed growth in banks’ mortgage loans
09/30/17 9.1652 11.5811 -2.4159
12/31/17 9.0088 10.9833 -1.9745 is not significantly different from the predictor
03/31/18 7.3460 9.2845 -1.9384 in Q2-2019.
06/30/18 6.7075 7.4872 -0.7796
09/30/18 5.9802 6.2220 -0.2418
12/31/18 5.3499 5.1267 0.2232
03/31/19 5.3996 3.7915 1.6082
06/30/19 5.3107 3.4010 1.9098

PANAMA
References
Bank for International Settlements, 2012, “Operationalising the Selection and Application of
Macroprudential Instruments,” CGFS Papers No.48 (Basel: Bank for International
Settlements).
Borio, C., Drehmann, M., 2009. “Assessing the Risk of Banking Crises – Revisited,” BIS Quarterly
Review (Basel: Bank for International Settlements).
Cevik, S., (forthcoming), “Where Should We Go? Internet Searches and Tourist Arrivals,” IMF Working
Paper (Washington: International Monetary Fund).
Geanakoplos, J., 2009. “The Leverage Cycle,” Cowles Foundation Discussion Paper No. 1715R
(Connecticut: Yale University).
Ghent, A., and Kudlyak, M., 2010. “Recourse and Residential Mortgage Default: Theory and Evidence
from U.S. States” Federal Reserve Bank of Richmond Working Paper No. 09-10R.
International Monetary Fund, 2011, “Housing Finance and Financial Stability—Back to Basics?”
Chapter 3 in Global Financial Stability Report, April (Washington: International Monetary
Fund).
International Monetary Fund, 2011, “Toward Operationalizing Macroprudential Policies: When to

Act?,” Chapter 3 in Global Financial Stability Report, September (Washington: International
Monetary Fund).
International Monetary Fund, 2014, “Staff Guidance Note on Macroprudential Policy,” IMF Policy
Paper, December (Washington: International Monetary Fund).
International Monetary Fund, 2014, “Staff Guidance Note on Macroprudential Policy—Detailed

Guidance on Instruments,” IMF Policy Paper, December (Washington: International Monetary
Fund).
Martinez, P., Monem, H., and Prasad, A., (2016), “Macroprudential Policy and Financial Stability in the
Arab Region,” IMF Working Paper WP/16/98 (Washington: International Monetary Fund).
Piazza, R., 2013. “Technical Note on Housing Market,” IMF Financial Sector Assessment Program
(Malaysia) Technical Note (Washington: International Monetary Fund).
Shleifer, A., and Vishny, R., 2011. “Fire Sales in Finance and Macroeconomics,” Journal of Economic
Perspectives—Volume 25, Number 1.

PANAMA
STRUCTURAL POLICIES IN PANAMA: BACKGROUND

AND POLICY RECOMMENDATIONS1
Over the last 25 years, Panama has had the longest and fastest economic expansions in
Latin America growing at an average annual rate of 6 percent. To sustain high growth
and avoid falling in the “middle-income trap”, Panama needs to adopt a structural reform
agenda to enhance productivity. Continuously improving the business environment,
advancing the quality of education, mitigating institutional vulnerabilities and fostering
innovation lie at the heart of increasing labor productivity and closing the gap to
advanced economies. Over the medium term, upgrading the infrastructure and creating
economic conditions that facilitate the transition into technology-intensive, innovative
industries with a high growth potential will be necessary to achieve high-income living
standards.
A. Drivers of Growth: High Investment, but Slowing Productivity
1. Panama needs to maintain high investment rates and boost productivity growth to
sustain high economic growth rates. In the last decade, Panama experienced extraordinarily high
investment rates. Mainly driven by large projects such as the Panama Canal expansion and the
construction of one of the largest copper mines in the world, the additional capital may not have
contributed immediately to additional output, leading to negative TFP growth. The delayed impact
on output is likely to add to TFP growth in the next few years while investment rates are expected to
normalize to below 40 percent of GDP. With moderate population growth, future growth will
increasingly rely on improvements in total factor productivity. 2
Figure 1. Panama: Growth Accounting

Growth Accounting Contribution to Growth of Factors of Production
(In percent)
15 (In percent)
Human capital Labor
Capital TFP L HC K TFP Y
GDP growth
10
1970-1979 1.0 0.4 5.2 -1.8 6.2
5
1980-1989 1.2 0.5 1.6 0.0 3.3
0
1990-1999 1.9 0.4 2.9 0.4 5.6
-5
2000-2009 1.7 0.3 2.9 0.7 5.6
-10 2010-2019 0.8 0.2 7.2 -2.0 6.2

1990 1995 2000 2005 2010 2015
Sources: Penn World Table 9.1 and IMF staff calculations.
1
Prepared by Julia Faltermeier (WHD).
2
See Hadzi-Vaskov (2018). “Is There a Middle-Income Trap? Singular Growth Patterns in Panama”. IMF SIP, Washington D.C.

PANAMA
Figure 2. Panama: Labor Allocation Across Sectors

Sectoral Productivity and Employment Share of Employment vs Contribution to GDP
(100 = aggregate labor productivity) (In percent)
600 25
Electricity, gas & Wholesale, retail &
water repair of vehicles
500
20
Contribution to real GDP (%)

Construction
400 Transport, storage &
Financial 15
Productivity
communications
Intermediaries
300 Real estate, renting
Transport, storage & Financial
& business activities
communications 10 intermediaries
200 Construction Wholesale, retail &
Real estate, renting repair of vehicles Electricity, gas & Manufacturing
& business activities Manufacturing Health & social water Agriculture and
5
100 services Hotels & restaurants fishing (incl. mining)
Hotels & restaurants Other community, social Agriculture and Other community, social & personal services
& personal services fishing (incl. mining) Health & social
Private education Private education
services
0 0
0 5 10 15 20 1 6 11 16 21
Employment share (%) Employment share (%)
Sources: INEC and IMF staff calculations.
2. While productivity growth has been exceptionally high in some segments of the
economy, relatively unproductive sectors still make up a large share of employment. Labor
productivity is especially low in non-tradable sectors, including commerce, hotels and restaurants,
education, health, social services, sectors which employ about half of the labor force. Labor
productivity growth has been high in construction, electricity, finance and transportation services,
suggesting gains from reallocating labor in addition to policies that support productivity growth
within sectors.
3. Slow reallocation of labor among sectors and lack of skilled labor is holding back
growth. Structural transformation of the economy and enabling labor to move into the high
productivity sectors will be key to sustain growth and reduce inequality. Education to prepare the
labor force for high skilled jobs, reducing informality and improving labor mobility can help to
facilitate reallocation of workers into more productive and growing sectors. While years of schooling
are in line with the regional benchmark, enrollment in secondary education and educational quality
need to be improved, including higher education. Initiatives to boost teacher training, reduce
dropout rates and better align the curriculum with businesses needs are important to develop a
skilled work force. At the same time adult education, on-the-job training and offerings of technical
careers can help with upgrading the current labor force.
4. Continuing to attract investment, secure large infrastructure projects along the

Panama Canal and developing tourism will foster growth in the medium-term. The completion
of two large investment projects, the expansion of the Panama Canal and the construction of the
large copper mine, has been reflected in lower demand for labor and partly accounts for the
downturn in construction observed over the last year. Although there are several other large
projects still in progress which can absorb part of this freed up labor, like the 3rd metro line, the 4th
bridge over the canal and investment in port infrastructure along the canal, construction is unlikely
to return to the levels of growth it saw during the boom.

PANAMA
Figure 3. Panama: Competitiveness Indicators Show Some Room for Improvement
GCI Ranking Competiveness Score in the Americas Relative to Income

(Rank, lower ranking = higher relative competitiveness) (GCI score, higher=more competitive)
140 90
120 Range Panama Avg. LAC

80
100
83.1 70
GCI 4.0 2019

80 PAN
60
60 66
50
40
20 40
0 30
2007 2009 2011 2013 2015 2017 2019 7 8 9 10 11 12
Log(PPP GDP per capita)
Sources: World Economic Forum and IMF staff calculations.

Note: Dashed line corresponds to ranking under GCI 4.0 which contains changes in methodology relative to previous versions.
5. Regional disparity in growth is high. Most of the growth has been concentrated in
Panama City and Colon, the urban center of Panama. These regions benefit from the proximity to
the canal and make up the center of the services-oriented Panamanian economy. However, growth
in Colon has slowed with the decline in activity in the Colon Free Zone and will depend on a
successful shift in the zone’s business model, for example by converting the zone into a hub for e-
commerce. To allow rural areas also to participate in the economic expansion, it is important to
connect them better to public services and enhance the infrastructure and business environment for
agriculture and tourism - sectors which can grow economic activity outside of the urban centers.
6. Increasing productivity in agriculture could also help to diversify the economy and
develop rural areas, decreasing poverty and inequality. Along with non-tradable services,
agriculture employs a large share of the population but is relatively inefficient. Instead of subsidies
that sustain the status quo, policy should focus on improving efficiency, releasing excess labor for
other sectors and achieving higher wages for the remaining agriculture workers. The commercial ties
with China open new markets for Panama’s agriculture exports such as the recent first shipment of
meat products while fostering upgrades of quality and sanitary standards.
B. Growing Capital with a Favorable Business Environment
7. Panama outperforms the regional peers in different competitiveness indicators, but

progress has stagnated recently. Panama’s rank dropped from 55 (out of 135 countries) in 2017 to
66 (out of 141 countries) in 2019 according to the Global Competitiveness Index (GCI) of the World
Economic Forum. Moreover, the GCI score is lower than would be predicted by Panama’s level of
income. The ranking highlights the stable macroeconomy, business dynamism and health as strong
pillars. However, low ratings for institutions, product and labor markets, skills, Information and
Communication Technology (ICT) adoption and innovation capability require policy action.

PANAMA
8. While the business environment in the special economic zones (SEZ) is highly
competitive, the conditions are less favorable for firms outside these areas. Firms in the free
zones (around 3500 firms generating over 30,000 jobs, around 1.7 percent of total employment in
2010) 3 benefit from tax incentives and a relatively efficient bureaucracy. For 2010, Hausmann et al.
(2016) find wage differences between SEZs and the local labor markets unexplained by worker
characteristics which points to firm productivity differences as the main explanation. Outside the SEZ
many firms are small, often operate in the informal sector and face a higher administrative burden.
For 2010 the Enterprise Survey estimates that around a third of firms have less than 20 employees. 4
Enhancing firm productivity for small and medium enterprises will be crucial for future economic
growth to ensure that growth is not limited to special zones. Different competitiveness indicators
suggest similar priorities which can be a starting point for the policy agenda.
9. Business dynamism and depth of financial system are key to Panama’s

competitiveness, despite weak insolvency framework. The GCI places Panama on rank 77 out of
141 in this category. When it comes to the time it takes to open a business, Panama reaches rank 32,
and regarding attitudes towards entrepreneurial risk, the cost of starting a business and growth of
innovative companies are all better than the median country. The depth of the financial system with
good access to venture capital and credit for SMEs places Panama well-above the regional peers.
Ranked as the 46th best country in this pillar, the financial system remains a key competitive
strength. This competitive advantage can be leveraged further. However, a low insolvency recovery
rate and a weak assessment of the insolvency regulatory framework hold Panama back.
Figure 4. Panama: Global Competitiveness Index

Global Competitiveness Index 2019 Global Competitiveness Index
(From 0 to 100, where 0=worst and 100=best) (From 0 to 100, where 0= worst and 100=best)
2019 LAC range 2019 Panama 2017 LAC range 2017 Panama
Institutions
Innovation 100 100
Infrastructure
capability 80
80
Business 60
ICT adoption
dynamism 40 60
20
Macroeconomic 40
Market size 0
stability
20
Financial system Health 0

Skills
Product market
Institutions
dynamism
Labour market
Infrastructure
Financial system
Market size
ICT adoption
Health
Macroeconomic
Innovation
capability
Business
Labour market Skills LAC average

stability
Product market Panama
Sources: World Economic Forum and IMF staff calculations.
3Hausmann, Obach and Santos (2016). “Special Economic Zones in Panama: Technology Spillovers from a Labor
Market Perspective.
4 This duality in the Panamanian economy is not always well reflected in the available statistics. While aggregate
indicators often include the whole country, doing business surveys are generally restricted to small to medium-size,
100 percent domestic firms, thus excluding many firms located in the free zones, which would improve the indicator if
they were included.

PANAMA
Policy Options
• Reduce red tape, and administrative and compliance cost incurred with formal status of firms.
• Expand use of one-stop shops for business creation and licenses.
• Address deficiencies in the insolvency framework, especially the low insolvency recovery rate.
10. The openness of the economy gives Panama a high rating in “Product markets”,
especially due to low barriers to trade. Advances in the negotiation of the trade agreement with
China, improvements in sanitary standards and the implementation of the WTO trade facilitation
agreement should all contribute positively to sustain the competitiveness of product markets. The
main obstacle to competition stems from distortive taxes and subsidies (GCI 107th out of 141
countries), the product of various tax exemptions, subsidies and presence of tax evasion (see
chapter 1 for more details). Simplifying the tax code, increasing transparency and better
enforcement by the tax and customs administration can address these distortions and improve
revenue collection at the same time.
11. Traditional competitiveness indicators do not account for the tight restrictions on
many occupations. Several occupations in Panama can only by exercised by Panamanian nationals
and no work authorization will be granted to foreigners, independent of their qualifications. These
occupations range from medicine, dentistry, law and some fields of engineering to journalism,
sociology, and accounting. While there exists no quantitative estimate of the effect on
competitiveness in Panama, these regulations create incentives for rent-seeking and the varying
degree of restrictiveness can create distortions across sectors. While traditional indicators highlight
the difficulty in hiring foreign labor, the indicators do not capture the effect of restricted
occupations in the market for professional services.
Institutions and Governance
12. The institutional framework needs to

Corruption Perception Index in the Americas 1/
be strengthened to avoid the middle-income (2018, Lower score=more perceived corruption)

85
trap. While GDP growth has moved Panama into 75
a higher income category, the governance 65
CPI Index 2018
framework requires reform to enable sustained 55
growth in the future. The recent UNDP report on 45
Human Development in Panama (2019) 5 35 Panama

25
emphasizes the importance of institutional reform
15
to address low levels of trust in institutions by 7 8 9 10 11 12
Log(PPP GDP per capita)
citizens as well as weaknesses such as the judicial Sources: Transparency International and IMF staff calculations.
1/ Includes 90 percent confidence interval for Panama.
system and corruption identified by international
investors. Similarly, Panama ranks 110th in “Institutional checks and balances “of the GCI.
5
UNDP Informe Nacional de Desarrollo Humano Panama 2019.

PANAMA
13. The public administration needs to build capacity to become more efficient and meet
standards appropriate for a high-income economy. The UNDP report urges the authorities to
move to a results-based institutional culture where policy actions are motivated by the impact on
citizens. It proposes a number of reforms such as limiting the strong association between state
operations and the current government in power that leads to high rotation of government officials
and a lack of professionalization of the civil service. It highlights that an adequate adaptation and
implementation of laws, directives and incentives would be a first step to increase the citizen’s trust
in Panama’s institutions.
Policy Options
• Professionalization of public administration, including a shift towards results-based objectives.
• Increase transparency and efficiency of public spending, i.e. phase out turnkey project,
strengthen accountability of public officials and improve communication (website, data provision
to the public, press releases).
14. Deficiencies in the judicial system generate large costs to businesses and undermine
the credibility of Panama’s legal framework. Judicial independence is ranked very low (129 out of
141 countries) and is deteriorating. While the last ten years saw some new laws to modernize the
judicial system (such as Carrera Judicial Tribunal de Integridad y Transparencia, Código Procesal
Penal de Corte Acusatorio), the system is perceived as slow and as lacking accessibility and
transparency. Many unaddressed cases, the lack of convictions on corruption and a weak track
record on settling disputes (GCI rank 110 out of 141 countries), all demonstrate the need for reform
in this area. The new administration started a process for constitutional reform, but there is still no
social consensus on some of the content of the reform. Moreover, the avenue for passing the reform
is unclear. The reform package was withdrawn from the National Assembly at the end of 2019 and
the UNDP will now coordinate the dialogue with civil society to draft the reform. Before the end of
this lengthy process, progress should continue with more effective implementation of the already
existing institutional framework.
Policy Options
• Increase the budget of the justice administration (currently 1.3 percent of the general budget, 2
percent - 6 percent is the international recommendation by UNDP) to ensure independence of
the judicial system and enable it to implement reforms.
• Address shortcomings of the judicial system
• Facilitate access to the many Panamanians that cannot afford the cost of legal assistance.
C. Increasing Human Capital and the Availability of Skilled Labor
15. Inflexible wage setting and strong restrictions on hiring and firing practices stifle
competition in the labor market and lead to inefficient allocation. When it comes to the link

PANAMA
between pay and productivity and hiring and firing practices, Panama ranks among the lowest 30
countries in the world according to the Global Competitiveness Index. Higher flexibility in the labor
market can aid the reallocation of resources to its most productive use. However, emerging
vulnerabilities created by a reduction in job security require an adequate social safety net.
16. Shortage of skilled labor are an obstacle to many firms. With the expansion in skill-
intensive industries such as logistics and other tradable services, firms in Panama complain about
difficulties in finding skilled employees. Deficiencies in the education system as well as restrictions
on hiring foreign workers already restrict the expansion of high value-added industries and decisive
policy action is needed to prevent a continued drag on productivity and growth in the medium-
term.
Policy Options
• Educational reform needs to be a top priority of the government, tackling the low quality of
education (teacher training, curriculum) and the low rates of enrollment in secondary education.
• Strengthen higher education and research institutes, for example, through better funding and
more research positions.
• As a short-term solution, easing restrictions on foreign workers, especially in sectors with high
skilled shortages (maybe also qualified teachers) can alleviate the labor constraints.
D. Boost Productivity with Higher Innovative Capacity
17. Panama’s ability to maintain high growth in the future crucially depends on its
innovative capacity. This rests in part on the continued attractiveness to FDI, the expansion into
high value-added sectors and a skilled workforce to absorb knowledge spillovers. While the number
of trademark applications and survey responses on buyer sophistication show promising levels,
Panama lags behind in its quality of research institutions and R&D expenditure. In the past, special
economic zones were the main attractor of foreign talent and knowledge-intensive industries.
However, spillovers to the local economy appear to be limited, also because of restrictions on the
mobility of foreign workers. 6 The new administrations’ national strategy to raise investment in
science, research and development to 1 percent of GDP by investing US$ 4.3 billion until 2024 is a
step in the right direction.
E. Upgrading Infrastructure
While the existing infrastructure is strong compared to regional peers, Panama needs to
upgrade it further to reach high income economy living standards and sustain its
productive capacity in the medium term.
6
See Hausmann et. Al. (2017)

PANAMA
Water
18. Potable water supply is an ongoing challenge. Panama ranks 90 out of 140 countries on
the reliability of water supply in the GCI, with the score declining since the previous review. It
performs slightly better in the exposure to unsafe drinking water (66/140, 10.2 percent of the
population). Water access is higher in urban areas than in rural areas, but a large share of the
population in the underdeveloped indigenous territories does not have access to piped water.
However, reliability of service also varies in urban areas. The National Water and Sewer Agency
(IDAAN) has not raised tariffs since 1982 (plus collection rates are low), runs a sizeable operational
deficit which increased US$ 80.5 million (0.1 percent of GDP) in 2018), forcing it to focus on
emergencies and maintenance rather than improving efficiency. Although reform plans by the
authorities exist, more coordinated action will be required to improve the water infrastructure.
19. Climate change heightens the need for further investment in water supply and water
management systems. Panama is one of the countries with the highest precipitation in the world,
but it’s largest commercial asset – the Panama Canal – is also a large user of fresh water along with a
growing population. Climate change appears to have increased the volatility of rainfall, posing a
challenge to maintain water levels sufficiently high during the dry season, especially during El Niño
periods, and avoid flooding in the rain season. Currently, 55 percent of the population receives their
water from eight water treatment plants that draw water from the canal’s principal reservoirs: the
two lakes Gatun and Alajuela. They store water to guarantee enough supply during dry periods, and
release excess water to the sea to prevent flooding during the rainy season. As demonstrated by the
cargo limitations imposed by the ACP in 2019 due to low water levels, the current capacity of the
lakes is becoming insufficient to smooth out fluctuations in precipitation.
Policy Options
• Amplify fresh-water reservoirs The ACP is currently evaluating several options to enlarge its
water reservoirs, including three options to construct a third water reservoir to fresh water
resources at a larger distance from the canal. Other possibilities include desalination of sea water
or increasing the capacity of the existing reservoirs. These projects are still in the evaluation
phase, but the ACP is well-aware of the future challenges related to water management faced by
the canal.
• Improve efficiency of water system Panama loses an estimated 40 to 48 percent of fresh water in
the distribution system due to leakages and lack of investment in water infrastructure. At the
same time, fresh water is basically free and there are hardly incentives to avoid waste of fresh
water. Reforming the structure of water pricing and investing in water management
infrastructure to reduce leakages would save a lot of freshwater reducing the need of investing
in larger reservoirs. 7
7
Larsen (2019) estimates that reducing leakages to under 1 percent would be equivalent to constructing a new
reservoir of the size of Alajuela.

PANAMA
Electricity
20. Panama’s electricity sector can meet the rising demand while continuing to strengthen
renewable energy sources. Electricity generation has increased on average 7 percent per year over
the last five years. Around 60 percent of electricity is hydroelectric (12.4 percent growth rate), with
the rest mostly coming from fuel-oil, non-renewable sources. However, the country has potential to
expand solar photovoltaic and wind energy. This puts Panama to a competitive position and in line
with reaching its climate goal of obtained 70 percent of the national energy mix from renewables by
2050. 8
21. Access to electricity is still unequal. While 91.2 percent of households had access to
electricity nation-wide in 2017, this number varies between 98.5 percent in Panama City and only
77.1 percent in the province Darien. In the comarcas Ngäbe Buglé and Guna Yala only 7.5 percent
and 3.6 percent respectively received electricity from the distribution companies. 9
22. The sector is vulnerable to large fluctuations in precipitation amplified by climate

change. Dry seasons and El Niño periods drive up the marginal cost of electricity as hydroelectric
power generation plummets and thermoelectric power plants are required to help maintain the
system voltage. To mitigate this risk, Panama will need to invest in its energy matrix and improve
transmission systems linking power plants with areas of high demand. While there has been
constant investment in generation capacity, upgrades of the transmission lines proceed at a slower
pace. 10
23. Panama uses many different tariffs for electricity and cushions price increases with
general subsidies. Overall, electricity prices in Panama are slightly higher than the regional average.
Basic consumption of less than 100 kWh is cross subsidized from additional payments of
consumption exceeding 500kWh. Pensioners, disabled persons, farmers, political parties also benefit
from special tariffs. Moreover, the government prevents price increases by using general subsidies
which benefit over 90 percent of consumers, households and businesses alike. The latest surge in
electricity subsidies originated in wide-spread protests in 2018 which led the government to back
track on an increase in electricity prices. In 2019, the government spent US$ 193 million (0.3 percent
of GDP) on electricity subsidies and the policy is expected to continue in 2020. Improving the
targeting of subsidy or replacing it by social transfers could help to limit the cost and improve the
effectiveness of the policy to tackle inequality.
Policy Options
• Phase-out general electricity subsidy to avoid large cost incurred by government and improve
targeting to help most vulnerable population, for example through social transfers or continuing
subsidies only for low-income consumers/ small businesses.
8National Energy Plan 2015-50. In addition to decarbonization of the energy matrix, the strategy also sets out to (i)
provide universal access, (ii) reduce and improve efficiency of energy use and (iii) ensure energy security.
9 The comarcas have other sources of energy such as solar panels and kerosene.
10 See the MEF report on the electricity (2017) sector for a detailed analysis.

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• Continue with investment in transmission lines (e.g. 4th transmission line).
• Tackle challenges created by climate change – diversify renewable energy matrix and improve
water management.
• Reduce dependence on generators to mitigate effect of high oil prices and phase out non-
renewable energy sources.
Cost of Getting Electricity Price of Electricity

(Percent of income per capita) (US cents per KWh)
Nicaragua Nicaragua
Honduras Guyana
Bolivia Panama
Ecuador Belize
El Salvador Honduras
Colombia Guatemala
Guatemala Dominican Republic
Peru Colombia
Guyana Peru
Belize El Salvador
Mexico United States
Dominican Republic Brazil
Brazil Bolivia
Costa Rica Mexico
Chile Costa Rica
United States Ecuador
Argentina Argentina
Panama Chile
0 200 400 600 800 1000 0 10 20 30 40

Source: Doing Business 2020, World Bank.
Cost of getting electricity is defined as cost required to complete procedures to obtain an electricity connection. Price of electricity is defined as price
based on monthly bill for commercial warehouse in Doing Business study.
Transportation
24. With several large transportation infrastructure projects in place, Panama is well on
track to continue to enhance the competitiveness of its transportation system. The ports and
Tocumen airport are among the most competitive in the world, enabling growth in the logistics
sector and a major factor in attracting FDI. However, these advances have been concentrated in
Panama City and Colon, with the rest of the country still in need of better road access. A particular
concern is the “last mile”. While highways are relatively developed, more investment is needed in
secondary roads. Investments in the regional transportation network would also support growth in
tourism and addresses rural poverty.
Information and Communication Technology
Improved access to internet and the spread of financial technology can improve financial
inclusion. Despite the developed financial sector, only 46 % of the population had a bank account
in 2017, below the average 55 % in Latin America and the Caribbean. Moreover, only 69.1 % of
businesses used a current or savings account, compared to 92.9 % in the region. The most common
reasons were insufficient funds to open an account (36 %), too expensive financial services (34 %)
and distances to the financial institution (18 %) according the Global Findex 2017. 11 Fintech
promises to avoid the high cost of infrastructure to reach the rural and indigenous population and
to reduce the cost of financial services.
11 See MEF, Propuesta para la Estrategia de Inclusion Financiera en Panama (2019).

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25. Panama should make better use of its proximity to a high-speed international internet
connection. Panama is located close to a digital interconnection of submarine cables and thus has
access to higher bandwidth than even most OECD countries. This could make it an attractive
location for IT companies but will require further investments in a skilled workforce.
F. Concluding Remarks
26. An ambitious structural reform agenda is needed to ensure sustainable, inclusive

growth in the future. This paper lays out key areas for policy to prevent Panama from falling into
the “middle-income trap”. By continuously improving the business environment, advancing the
quality of education, mitigating institutional vulnerabilities and fostering innovation Panama can
close the gap to advanced economies. Investment in infrastructure and climate change
preparedness can upgrade and sustain living standards in line with a high-income status economy.
Together with Panama’s strong foundation as a logistics and transportation hub, creating the right
economic conditions can transform Panama into a technology-intensive, innovative economy with
sustained growth.

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References
Due Process of Law Foundation (March 2014), “Ley vs. realidad, Independencia y trasparencia de la
justica en Centroamérica y Panamá”, Informe de Panamá.
http://www.dplf.org/sites/default/files/panama_v05.pdf
IDB, BIDeconomics Panamá (March 2019), Desafíos para consolidar su desarrollo.
Ricardo Hausmann, Luis Espinoza and Miguel Angel Santos (2016), Shifting Gears: A Growth
Diagnostic of Panama.
Ricardo Hausmann, Miguel Angel Santos, and Juan Obach (2017), Appraising the Economic Potential
of Panama: Policy Recommendations for Sustainable and Inclusive Growth, CID Faculty Working
paper No. 334.
MEF (2017), Dirección de Análisis Económico y Social, Omar Araúz, Eudemia Pérez, Análisis del
Mercado Eléctrico Panameño.
MEF (2019), Propuesta para la Estrategia de Inclusión Financiera en Panamá.
Larsen, Matthew C. (2019). "Water supply and water quality challenges in Panama." in Advances in
Water Purification Techniques, edited by Ajuha, S., 41–46.
OECD Multi-dimensional Review of Panama (March 2019), Volume 3: From Analysis to Action.
UNDP, Informe Nacional de Desarrollo Humano Panamá 2019, Renovando las instituciones para el
desarrollo humano sostenible.
World Economic Forum, Global Competitiveness Index 4.0 2019 edition.
World Bank, Doing Business Panama 2019.

PANAMA
SOCIAL ISSUES IN PANAMA: BACKGROUND AND

POLICIES1
While Panama’s remarkable growth performance in recent years has been largely pro-
poor and contributed to significant reductions in poverty and inequality, the country faces
ongoing challenges on the shared prosperity front. Social inequities remain high relative
to peers, especially when compared to countries of similar income. The new
administration is well placed to redress social imbalances keeping in mind that equity
and inclusion are not only socially desirable goals but important conditions to ensure that
future economic growth is broad-based and sustainable. Coordinated policies to protect
Panama’s resources, especially water, are of increasing importance in light of the adverse
impacts of climate change on the region.
A. Background
1. Panama is a fast-growing high-income country but lags regional peers in human

development. Panama has reached a relatively high level of income with per-capita output of
US$26,822 in PPP terms in 2019—the highest in Latin America and the Caribbean. It has been the
fastest-growing economy in the region over the last two decades and one of the most dynamic
economies in the world. However, while its rapid growth accelerated poverty reduction and created
economic opportunities, Panama lags the peers in its income group in many aspects of social policy,
such as education, health, gender equality and social inclusion. According to the World Bank’s
Human Capital Index (HCI), which measures the amount of human capital that a child can expect to
attain by age 18 given the country’s health and education systems, Panama performs on par with
countries with much lower per-capita income, such as Nicaragua (per capita PPP GDP of US$5,290),
Tajikistan (per capita PPP GDP of US$3,589) and Paraguay (per capita PPP GDP of US$13,584).
Figure 1. Panama: A High-Income Economy that Lags Regional Peers
in Human Development
PPP GDP Per Capita Human Capital Index
(Thousands, 2019) (2017)
30 0.70
25 0.65
0.60
20 0.55
0.50
15
0.45
10 0.40
0.35
5
0.30
0 0.25
Mexico
El Salvador
Argentina
Colombia
Chile
Uruguay
Panama
Guatemala
Costa Rica
Peru
Paraguay
Haiti
Honduras
Ecuador
Nicaragua
Dom. Rep.
Mexico
El Salvador
Argentina
Colombia
Chile
Uruguay
Panama
Guatemala
Costa Rica
Peru
Paraguay
Haiti
Honduras
Ecuador
Nicaragua
Dom. Rep.
Sources: IMF World Economic Outlook, and World Bank Human Capital Index.
1 Prepared by Marina Rousset and Paola Aliperti F. Domingues.

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2. Progress on poverty Poverty and Inequality in Panama
reduction has been significant Inequality Gini coefficient

1989
58.9
2000
56.8
2005
53.8
2010
51.6
2017
49.9
in recent years, however Poverty 1/ (2011 PPP, % of population) 50.3 35.5 34.8 21.8 14.1
important gaps remain. Extreme poverty 2/ (2011 PPP, % of population) 23.9 12.4 10.0 4.5 2.5
Poverty in Latin America and the Caribbean
Panama saw a remarkable 1990 1999 2005 2010 2015 3/
reduction in poverty Poverty 1/ (2011 PPP, % of population) 49.3 47.0 40.9 31.1 26.3
headcounts and a rise of the Extreme poverty 2/ (2011 PPP, % of population)

Source: World Bank Poverty and Equity database.
14.8 13.5 9.9 6.2 3.9
middle class. The extreme Note: Dates for poverty data for Panama differ from those of Latin America and the Carribean due to data availability.
1/ Poverty headcount ratio at $5.50 a day.
poverty rate (as defined by the 2/ Poverty headcount ratio at $1.90 a day.
World Bank) dropped from 12.4 3/ Latest available.

percent in 2000 to 2.5 percent in 2017, while the general poverty rate was slashed from 35.5
percent to 14.1 percent over the same period—both at a much faster pace than elsewhere in the
region. Moreover, average income growth of the bottom 40 percent of earners has been faster
than that of an average citizen. However, rural poverty remains high and is particularly elevated
and persistent in the comarcas: territories inhabited by indigenous peoples.
Box 1. President Cortizo’s Commitments to Advance Social Policies

• Poverty and inequality: El Plan Colmena “Panama libre de pobreza y desigualdad, la Sexta
Frontera” (the “Beehive” plan) is a social program created by the current administration to fight poverty
and inequality in Panama through the empowerment of local governments and technical boards, with
help from civil society and Panamanian citizens. This plan aims to improve the lives of more than
777,000 Panamanians living in multidimensional poverty in 300 corregimientos (administrative districts)
of 63 districts in the country by (i) improving public services (such as healthcare, potable water,
sanitation, rural electrification, road infrastructure, education, and housing) and (ii) providing
employment to lift people out of poverty. A pilot program was launched in 6 corregimientos in the
Capira district with technical support from the United Nations Development Program (UNDP) and by
the Food and Agriculture Organization of the United Nations.
• Education and nutrition: The program Estudiar sin Hambre is an initiative put forward by the
Cortizo administration with the objective of providing balanced and nourishing meals to students in
primary and secondary schools of the 300 poorest corregimientos in Panama to develop healthy eating
habits and improve learning outcomes. It is also designed to support local farmers by purchasing their
products to provide the meals to these students. This program was approved at the end of 2019 and is
expected to launch a pilot in 2 schools in the Ngäbe Buglé region and one in San Miguelito. This
initiative is being executed by the Ministry of Education in coordination with the National Secretariat for
the Food and Nutritional Security Plan.
• Climate: The new administration’s priorities include mobilizing state and private resources to
encourage “climate-friendly” investment, promoting innovation in energy generation, protecting
vulnerable communities that face climate-change-related disruptions, promoting access to information
and empowering civil society, and facilitating climate action among young people through projects
such as the National Climate Transparency Framework and the Youth Academy on Climate Change.
B. Policy Priorities
Education
3. The quality of public education is key in improving social mobility and appears to be
of particular concern among social outcomes. Total social spending in Panama is low and rather

PANAMA
stable, it decreased from 10 percent of GDP in 2000 to 9 percent of GDP in 2018 and budget
allocations to education remain some of the lowest in the region (see also Chapter on Structural
Policies). As a result, enrollment rates (mainly in secondary education) and expected years of
schooling in Panama lag the poorest countries in the Americas, Nicaragua and Haiti (per capita PPP
GDP of US$5,290 and US$1,878, respectively), according to the HCI. Educational outcomes are also
poor – Panamanian students underperformed in international education tests 2 relative to other
countries, scoring on average only 32 percent above minimal attainment. In the latest 2018 Program
for International Student Assessment (PISA), Panama ranked 71 out of 77 countries, demonstrating
alarming comprehension deficiency in mathematics, science and reading among 15-year-old
students, which was little changed since the 2009 assessment. In the World Bank’s latest Enterprise
Survey, firm owners and managers identified poorly educated local workers as the third most
important obstacle to doing business in Panama.
4. Addressing these important shortcomings in education is vital for boosting Panama’s

long-term competitiveness and growth potential and will require a multi-year strategy, an
investment plan, and some degree of cooperation and support from experts in the field. The
strategy may include better aligning academic curricula with the needs of the private sector,
expanding training, monitoring and evaluation programs for teachers, offering culturally appropriate
education opportunities to the indigenous communities and expanding targeted support programs
for poor students (such as Beca Universal, see below). Since the HCI captures inequality of
opportunity in addition to measuring the disparities in future capital accumulation, Panama’s low
scores relative to peers point to productivity losses arising from income gaps and constrained social
mobility. This implies that in the absence of comprehensive social policy action within-country
educational gaps would widen in addition to cross-country gaps.
Figure 2. Panama: Education Spending and Outcomes in Panama are Low

Compared to Peers
Public Sector Social Spending Harmonized Test Scores
(Percent of GDP, latest available value) (2017)
16 480
Health
14 460
12 Education 440
10 420
400
8
380
6
360
4 340
2 320
0 300
Mexico
Belize
Mexico
El Salvador
Argentina
Colombia
Chile
Uruguay
El Salvador
Venezuela
Argentina
LAC
Colombia
Chile
Uruguay
Panama
Guatemala
Panama
Costa Rica
Bolivia
Peru
Paraguay
Haiti
Guatemala
Honduras
Ecuador
Nicaragua
Costa Rica
Peru
Paraguay
Haiti
Honduras
Dom. Rep.
Ecuador
Nicaragua
Dom. Rep.
Sources: IMF FAD Expenditure Assessment Tool (November 2019), and World Bank Human Capital Index.
2 TIMSS (Trends in International Mathematics and Science Study), PIRLS (Progress in International Reading Literacy
Study), PISA (Program for International Student Assessment), PASEC (Program of Analysis of Education Systems),
LLECE (Latin American Laboratory for Assessment of the Quality of Education) and EGRA (Early Grade Reading
Assessments), whichever applicable.

PANAMA
5. Recent initiatives to boost tertiary training are encouraging but their scale is small. The
newly-launched presidential program Academia Panamá para el Futuro, jointly supported by the
Ministry of Education and the City of Knowledge foundation, signals that the value of quality
training programs for talented students is increasingly recognized. It aims to provide enhanced
cross-discipline curriculum for best high school pre-graduates, preparing them to enroll in various
university programs in Panama and abroad. Outcomes and scalability of the program remain to be
assessed – at present, the size of the 2020 cohort is limited to 90 students and the quality of training
will need to be evaluated (the program was only launched in November 2019).
C. Poverty in the Comarcas
6. Poverty and lack of social services are highest among the indigenous groups,
representing 14 percent of Panama’s population. Panamanian authorities have been making
efforts to improve the lives of the indigenous population, however income disparities and lack of
social inclusion with the rest of the country persist. Strikingly, while the national poverty rate in
Panama was 20.7 percent in 2017, the poverty rate in the comarcas was 79.6 percent the same year 3.
Indigenous people living in the comarcas have the lowest incomes, access to basic services,
infrastructure and human capital compared to the general population. According to the World Bank,
Panama’s indigenous population has the lowest level of electricity coverage in Latin America and the
largest gap in terms of access to clean water and sanitation between indigenous and non-
indigenous residents.
Figure 3. Panama: Poverty Reduction in Indigenous Territories Is Well Behind the

Rest of the Country
National Poverty Rates Poverty Rates in the Comarcas
(Percent of population) (Percent of population) Comarca Ngäbe Buglé
50 Comarca Guna Yala
Non-extreme poverty 100 Comarca Emberá
Extreme poverty 90 National general poverty
40
National general poverty 80
30 70
60
20 50
40
10 30
20
0 10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2012 2013 2014 2015 2016 2017

Sources: Ministry of the Economy and Finance (MEF), and InterAmerican Development Bank.
7. Addressing problems of social inclusion, poverty and income inequality in the

comarcas requires a multipronged strategy. Sustainable solutions should be based on: (i) better
provision of basic infrastructure and public services in the comarcas; (ii) delivery of culturally
appropriate economic opportunities (namely, jobs), developed in close cooperation with tribal
3
According to the national sources and the Interamerican Development Bank (see Figure 3). These estimates differ
methodologically from the World Bank’s poverty headcount ratios mentioned in ¶2 for cross-country comparison.

PANAMA
leaders and service providers who are attuned to the cultural specificities of the population; and (iii)
a higher degree of inclusion of the indigenous population in national decision-making processes.
Implementing the policy plans presented in the Comprehensive Development Plan for Indigenous
Peoples in Panama – designed by the National Indigenous working group with support from the
Panamanian government and UNDP – should provide a starting point that is socially acceptable to
all parties as it presents the consensual vision of the goals and priorities of the 12 indigenous
congresses on economic development, social development, and legal rights. In addition, it is
important to conduct continuous evaluation of the effectiveness and quality of education, social
assistance and health programs conducted in the comarcas to ensure priorities are being met.
D. Social Support Programs
8. Social protection programs have been an important tool for poverty reduction, but
their efficiency needs to be improved. Panama’s social protection system consists of various
support programs targeting the most vulnerable. Among them are: (i) Red de Oportunidades, a
flagship conditional cash transfer program introduced in 2006 to support families in extreme
poverty; (ii) 120 a los 65 program (originally 100 a los 70) in operation since 2009 providing a benefit
of US$120 per month to individuals over 65 years of age who do not receive contributory pensions;
(iii) Beca Universal put in place in 2010 to provide a cash transfer to children for school
achievements; and (iv) Angel Guardian established in 2012 to provide social assistance to people
with severe disabilities in poverty or vulnerable conditions. While these programs, a key fiscal tool
for poverty reduction, contributed to improved social outcomes over time, some gaps in coverage,
targeting mechanisms and cross-program coordination remain to be addressed by the authorities
with assistance from the World Bank and other social partners 4.
E. Gender Equality
9. Gender inequality in Panama is high relative to regional peers and countries with
similar income levels. As in other areas of social development, Panama achieved substantial
progress in improving women’s lives and opportunities since 2000, such as raising life expectancy
through better access to healthcare and sanitation, lowering female unemployment rates, and
increasing the number of high-level positions held by women. Despite these improvements, in 2017
Panama ranked 108 out of 160 countries in gender equality—tied with Namibia and Laos—scoring
worse than average outcomes for the region, high-income peers and the world overall. Areas of
particular concern, according to the United Nations and the World Bank, appear to be a relatively
high labor force participation gap (fewer females in the labor force than males, as a share of their
respective populations), very high rates of adolescent births, elevated maternal mortality rates
compared to peers, and political underrepresentation. In addition, while educational outcomes for
girls are higher than for boys – in terms of both attendance and test scores – these outcomes do not
translate into higher wages or better access to financial products for women.
4
The World Bank and other development partners are currently working with the Ministry of Social Development
(MIDES) on updating Panama’s conditional cash transfer programs, including through full recertification of
beneficiaries to improve targeting and enhance coverage.

PANAMA
Figure 4. Panama: Economic and Social Opportunities for Women are Limited
Compared to Peers
Gender Inequality Index Adolescent Birth Rate
(2018, higher value = more inequality) (Births per 1,000 women ages 15–19, 2015-20)
95
0.60 90
0.55 85
80
0.50 75
0.45 70
65
0.40 60
55
0.35 50
0.30 45
40
0.25 35
Mexico
El Salvador
Belize
Argentina
Colombia
Chile
Uruguay
Venezuela
Panama
Guatemala
Bolivia
Peru
Costa Rica
Paraguay
Haiti
Honduras
Nicaragua
Ecuador
Dom. Rep.
Mexico
El Salvador
Belize
Argentina
Colombia
Uruguay
Chile
Venezuela
Panama
Guatemala
Bolivia
Peru
Costa Rica
Paraguay
Haiti
Honduras
Nicaragua
Ecuador
Dom. Rep.
Source: United Nations Gender Inequality Index.
10. Reducing the gender gap requires coordinated actions from the public and private
sectors, as well as the public at large. Panama’s authorities demonstrated their political
commitment to gender equity through the creation in July 2018 of the Gender Parity Initiative (GPI), 5
a private-public alliance, and the launch of the National Council for Gender Parity in July-October
2018. The GPI’s plan is comprised of 12 measures and 59 actions, ranging from promoting job
opportunities for young women and women in conditions of greater vulnerability, to the
implementation of equal opportunity measures within companies. While this plan is comprehensive
and targeted, it will require committed follow-through, political support, some technical assistance,
and increased public awareness of gender issues and women’s rights. In addition, existing social
assistance programs should continue supporting women in poverty, especially those residing in rural
and indigenous areas, as they are most vulnerable to poor health outcomes.
11. Improving socioeconomic opportunities for women also requires legal reform. In the
World Bank’s Women, Business and the Law 2020 Index Panama scored 79.4 (close to the average
score for Latin America and the Caribbean) 6, which implies that women in Panama are not on equal
legal footing as men (a score of 100 translates into equal legal rights). Specifically, while Panamanian
women are awarded the same rights as men in the dimension of economic participation (for
example, physical mobility and asset ownership), they fall short in the financial dimension (especially
pension and pay, scoring only 50 out of 100 on both). This means that in Panama work of equal
5 The GPI is made up of 9 public institutions (Panama’s Vice-Presidency and Ministry of Foreign Affairs, the Ministry of
Economy and Finance, the Ministry of Labor and Labor Development, National Women’s Institute, Small and Medium
Enterprise Authority, the Panama Canal Authority, the Superintendence of the Securities Market, National Secretariat
of Science and Technology, and National Institute of Vocational Training and Training for Human Development), the
leaders of 7 business groups and private companies, 5 economic and social organizations, and 3 IFIs (UNDP, UN
Women and ILO), in addition to the IDB – the founding IFI in LAC.
6While Panama’s score of 79.4 may sound high, it is equal to that of Burkina Faso, Belize and Fiji (in all cases, with per
capita PPP GDP less than half that of Panama).

PANAMA
value is under-remunerated for women 7, and that women generally retire with lower pension
benefits (for example, due to lower mandatory retirement age 8 or no pension contribution during
maternity leave). In addition, Panama’s score of 75 on entrepreneurship implies that relative to men,
women are more constrained by the regulatory framework when it comes to starting and running a
business (including access to financing) 9. All of these shortfalls can only be addressed by
modernizing the legal framework, such as by introducing and enforcing equal-pay legislation,
equalizing the mandatory retirement age, establishing pension credits for periods of childcare, and
prohibiting gender-based discrimination in access to financial services. The report documents a
positive correlation between gender equality and income per capita as well as such development
outcomes as larger investment in health and education (both for women themselves and for the
next generation) and lower maternal mortality rates, underscoring that equal rights yield long-term
economic benefits.
F. Climate Change
12. Without policy action, adverse effects of climate change will unduly affect the poor.
Climate change affects a broad spectrum of economic activities (e.g. agriculture, tourism, energy
and transport sectors) and impacts long-term growth and productivity. In addition, it has a direct
impact on the population, especially those lacking adaptation resources. Recent cross-country
research confirms that “initial inequality causes the disadvantaged groups to suffer
disproportionately from the adverse effects of climate change, resulting in greater subsequent
inequality” (Islam and Winkel, 2017; authors’ italics). In Panama, those facing imminent displacement
due to rising seawater levels are often indigenous communities residing on island clusters and along
the shoreline (e.g. the Guna people in the Guna Yala region), as well as many residents of the
Panama City and Colón metropolitan areas. A committed policy strategy is required to protect
Panama’s resources, both human and natural.
• Adaptation policies. Due to its vulnerability to extreme-weather events 10, a sustainable growth
model for Panama must incorporate climate change adaptation policies. The authorities have
already demonstrated their high-level commitment to these adaptation strategies by developing
7 To reduce the wage gap between men and women, Panama was the first country in the region to join the
International Coalition for Salary Equality and to launch the International Coalition for Equal Remuneration in January
2018, promoted by the International Labor Organization (ILO), UN Women and the Organization for Economic
Cooperation and Development (OECD).
8 In Panama, the retirement age for women is 57 years, and that of men is 62 years.
9 To support female entrepreneurs, Panama introduced the Women Entrepreneurs Platform (Canal de Empresarias) at
the City of Knowledge in 2015 (co-funded by the IDB) to provide technical support and mentorship to women-led
startups and existing SMEs. The low entrepreneurship score however reflects legal, not logistical, deficiencies.
10
Including intense and protracted rainfalls, windstorms, floods, droughts, wildfires, earthquakes, landslides, tropical
cyclones, tsunamis and El Niño-La Niña events, whose combined annual cost is estimated to range between US$ 125
and 150 million (0.36% to 0.42% of GDP), according to the Strategic Government Plan “Panama 2030”.

PANAMA
a number of policies, 11 each in collaboration with international agencies with expertise in the
field. In addition, the government initiated the creation of a Joint Task Force and a Regional
Satellite Visualization and Monitoring System to respond to extreme weather events; the
adoption of a National Water Security Plan 2015-50; vulnerable community reallocation
programs; and national and regional plans for climate-change resilience of the agricultural
sector. Currently, Panama’s Ministry of the Environment is preparing its Climate Action Plan
2020-25. However, many of these initiatives remain at the stage of feasibility studies,
vulnerability maps and definitions of line of action, with long-term fiscal implications of a
resilience-building strategy not yet budgeted and sources of financing not fully identified.
• Mitigation policies. Although Panama’s per-capita and aggregate contributions to global

greenhouse gas emissions are relatively low, adherence to its Doha commitments12 and
climate-change mitigation policies is important. In order to pursue a low-carbon growth model
and fulfill its Sustainable Development Goals, Panama must adhere to its commitment to meet
the growing electricity demand with mostly renewable energy, capitalizing on its endowment of
hydroelectric resources. In addition to “green” energy provision, the country committed to: (i)
promote the use of new technologies for improving the efficiency, generation, storage,
transmission and distribution of energy; (ii) sustainably manage its forest resources, including
through reforestation and agroforestry; and (iii) protect its water resources.
• Water management. Despite ample rainfall, fresh water is becoming an increasingly scarce
resource in Panama due to a combination of rising demand, volatile rainfall, sizable technical
losses and a lack of storage infrastructure. An estimated one-half of drinking water is currently
lost before reaching the consumer, while a growing population and expanded Canal operations
demand more freshwater resources. While these concerns led the authorities to create the 2015
National Water Plan, further policy action, including urgent upgrades of the water infrastructure
and prudent resource management, is crucial to secure water supply—the most fundamental
human need—not only to support agricultural needs and sustainable functioning of the Canal,
but to protect Panama’s population, including its most vulnerable segments (also see Chapter
on Structural Policies).
11Including the National Climate Change Policy, along with the National Adaptation Plan, the National Plan for
Coastal Erosion Processes, the Integral Plan for Sustainable Urban Mobility, National Energy Plan 2050, National
Strategy for Sustainable Livestock, National Forest Strategy 2050, Emission Reduction Plan for the Aviation Sector,
and the Panama Resilience Strategy.
12 Panama ratified the Kyoto Protocol in 1999 and, in 2015, the Doha Amendment on the reduction of greenhouse
gas emissions by December 31, 2020. Furthermore, the authorities ratified the Paris Agreement on climate change in
2016 and pledged to ratify the Kigali Amendment to the Montreal Protocol in September 2018.

PANAMA
Figure 5. Panama: Fresh Water Is Becoming Scarce Despite Generous Endowment
Freshwater Resources Per Capita Panama's Potable Water Losses 1/

(Cubic meters, 2017) (Percent of production)
60 60
50
50
40
Thousands
40
30
20 30
10 20
0
10
Mexico
El Salvador
Argentina
Colombia
Chile
Uruguay
Panama
Guatemala
Peru
Costa Rica
Paraguay
Haiti
Honduras
Ecuador
Nicaragua
Dom. Rep.
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Sources: Food and Agriculture Organization, AQUASTAT data; National Public Services Authority (ASEP).
1/ Potable water losses registered by the Institute of National Aqueducts and Sewers (IDAAN). They include physical and commercial losses.
G. Conclusions
13. The timing for reform is opportune. The incoming administration should capitalize on
Panama’s existing strengths—such as its stable macroeconomic environment, strong growth and
relatively favorable demographics—to address such pressing domestic issues as poor quality of
public education; high poverty rates among remote and indigenous populations; inequality of
opportunity for disadvantaged gender and ethnicity groups; a wider and more robust social safety
net; and the adverse impact of climate change. Doing so in a timely and targeted manner is
imperative to: (i) take full advantage of Panama’s existing economic potential; and (ii) expand its
potential output in the long-to-medium term by raising the social capital and harnessing the full
extent of its human resources.

PANAMA
References
Consejo de la Concertación Nacional para el Desarrollo, 2017, “Plan Estratégico Nacional con Visión
de Estado Panama 2030.” (United Nations Development Programme, ISBN 978-9962-663-
33-1).
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IMF Country Report No.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

International Monetary Fund

© 2020 International Monetary Fund

©International Monetary Fund. Not for Redistribution

Approved By Prepared By Paola Aliperti F. Domingues, Olga Bespalova,

AML/CFT ISSUES IN PANAMA: BACKGROUND AND POLICIES ______________________ 19

©International Monetary Fund. Not for Redistribution

TOWARDS A MORE RESILIENT FINANCIAL SECTOR __________________________________27

MACROPRUDENTIAL POLICY IN PANAMA: IMPLICATIONS FOR THE REAL ESTATE

2 INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

STRUCTURAL POLICIES IN PANAMA: BACKGROUND AND POLICY

SOCIAL ISSUES IN PANAMA: BACKGROUND AND POLICIES_________________________78

INTERNATIONAL MONETARY FUND 3

©International Monetary Fund. Not for Redistribution

4 INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

FISCAL POLICY IN PANAMA: BACKGROUND,

Figure 1. Panama: Higher Deficit Increased Public Debt

Source: National authorities, IMF staff calculations.

INTERNATIONAL MONETARY FUND 5

©International Monetary Fund. Not for Redistribution

5. Despite recent fiscal deficits, Panama continues to enjoy access to international

6 INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

Figure 2. Panama: Composition of Tax Revenue and Expenditure

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©International Monetary Fund. Not for Redistribution

Table 1. Panama: Tax Expenditure

8 INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

• Strengthen compliance with tax obligations

• Re-establish a Large Taxpayer Unit to better manage large taxpayers

• Improve provision of public services, transparency and accountability to strengthen citizens’

• Undertake a cost-benefit analysis of tax exemptions and incentives.

• Review tax rates, especially for VAT and environmental taxes.

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©International Monetary Fund. Not for Redistribution

for Fiscal Analysis of Resource Industries Brazil 34 2 Yes

10 INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

Figure 3. Panama: Efficiency of Education Spending is Low Compared to the Region

Net Enrollment - Secondary ( in percent)

Sources: IMF Expenditure Assessment Tool (EAT)

16. The effectiveness of social and

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©International Monetary Fund. Not for Redistribution

Energy Subsidies by Product 1/

• Undertake an expenditure review (e.g. PIMA for infrastructure governance).

• Strengthen budget and expenditure control.

D. Strengthening of the Fiscal Framework

18. The accumulation of fiscal buffers Fiscal Buffers

cyclicality of the fiscal policy under the -0.2

SFRL. Over the medium term, as the debt to -0.4

interest rates, this will gradually lower the -1.2

government could save this additional space

12 INTERNATIONAL MONETARY FUND