Precautionary credit line provides Panama with crisis insurance

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Panama city harbor: Panama’s capital city has been especially hard hit by COVID-19. (photo: OGPhoto by Getty Images)

IMF mission chief for Panama, Alejandro Santos, speaks about the country’s outlook and using the 2-year Precautionary Liquidity Line of $2.7 billion as an insurance policy against shocks.

WASHINGTON, USA – After over two decades of record high growth, Panama is facing a sharp economic contraction following months of pandemic-related lockdowns. With support from the International Monetary Fund (IMF), the government is combating the economic shock, but with a second wave of contagion potentially underway, the country is using the precautionary liquidity line as an insurance policy against new shocks.

Qualifying for the precautionary line requires sound economic fundamentals and institutional policy frameworks, and a good track record of economic performance. IMF Country Focus spoke with the Fund’s mission chief for Panama, Alejandro Santos, about the country’s outlook.

How has the pandemic affected Panama?

Panama was severely affected. Being a regional trade, transportation, and finance hub highly integrated into the world economy, Panama was hit hard by the global downturn. Ship traffic through the Panama Canal dropped by about 10 percent and use of electricity by some 7 percent in 2020.

At the same time, health and social spending pressures surged. Panama has one of the highest COVID-19 fatality rates in the world, despite having a relatively good healthcare system. Nationwide lockdowns were enforced, but the rates of contagion remain high, particularly around Panama City, a densely populated area. This has affected economic activity, with output dropping by an estimated 9 percent in 2020. Tax revenues—already well below the regional average—have also fallen, resulting in a widening fiscal deficit and an increase in public debt.

Why choose a precautionary credit line?

It is an insurance policy against risks and can help boost investor confidence. A second wave of COVID-19 could trigger a deeper recession and lead to disruptions in private capital flows, putting further pressure on public finances. If such a crisis were to materialize, Panama could tap the line for liquidity. A country must have sound fundamentals and policies to qualify for a precautionary credit line. This sends an important signal to markets.

What are the top policy priorities and how does this arrangement support them?

The country is focused on getting through the pandemic. The immediate priorities are facilitating vaccination; supporting an adequate level of social and health spending; continuing to strengthen institutional policy frameworks, like financial integrity and data adequacy; and preparing the economy for a post-pandemic recovery. By boosting market confidence and providing protection against risks, the precautionary line can help the country weather the crisis and lay the groundwork for recovery.

Panama has had many IMF programs in the past. What was achieved and how is Panama different today?

Panama has had 20 IMF programs, two-thirds of them precautionary. These programs have been used to advance the governments’ reform agendas. Measures taken included reinforcing expenditure controls, strengthening revenue collection, privatizing enterprises, improving financial supervision, combating money laundering, and establishing targeted transfer programs to reduce poverty. As a result of these reforms, the economy grew at an average rate of 6 percent between 1992 and 2019—the fastest in region— and achieved the highest per capita income in Latin America.

Does the program include any measures to help Panama exit from the Financial Action Task Force (FATF) grey list?

The country agreed on an action plan with FATF, which provides a roadmap for addressing weaknesses related to financial integrity. The authorities have hired highly qualified international experts on anti-money laundering and combating the financing of terrorism to guide their de-listing process and ensure adherence to the highest international standards. The IMF is helping by providing technical assistance in this area.

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