Panama City, Panama: An International Monetary Fund (IMF) mission, led by Naomi Griffin, conducted discussions for the 2026 Article IV Consultation with Panama during September 23–October 6, 2026. At the end of the visit, the mission issued the following statement:
- Outlook and risks: Economic activity has surprised on the upside and remains resilient, with growth projected at about 5 percent in 2026, supported by strong transport, logistics, tourism, and financial services. Despite global headwinds, medium-term prospects remain favorable and risks are broadly balanced, but growth needs to become more broad-based.
- Fiscal policy: The authorities’ continued adherence to the fiscal path in the Social and Fiscal Responsibility Law (SFRL) is welcome. Sustained consolidation—underpinned by tax reforms, better expenditure prioritization and efficiency, and stronger fiscal institutions—is essential to reduce public debt, preserve investment-grade status, and rebuild buffers.
- Financial sector policy: The banking system remains well capitalized and profitable, and systemic risks are contained. Continued vigilance over liquidity and sectoral exposures, further implementation of the 2023 FSAP recommendations, and stronger crisis-management arrangements would reinforce resilience.
- Structural policies: Reforms to improve education and skills, reduce informality, strengthen governance and the business environment, and improve the quality of public investment would raise productivity and broaden the benefits of growth. Investment in water security and climate resilience is also critical.
Economic Outlook — Resilient Growth amid Global Shocks
Economic activity strengthened in 2025 and the first half of 2026. Real GDP grew by 4.4 percent in 2025, supported by the normalization of Panama Canal operations following the earlier drought and the fading impact of the Cobre Panamá mine closure. Growth gained further momentum in early 2026 as higher Canal traffic, expanded air connectivity, tourism, and related services offset more moderate domestic demand.
Growth is projected at about 5 percent in 2026. Inflation is expected to rise temporarily to slightly above 2 percent, driven principally by higher global oil prices, before returning to the 1–2 percent range over the medium term. The current account deficit is projected to widen to about 1½ percent of GDP in 2026, largely reflecting higher oil and other commodity prices, and to increase gradually thereafter as investment and associated imports strengthen. Panama’s 2025 external position is assessed as broadly in line with the level implied by fundamentals and desirable policies.
Medium-term prospects remain favorable. Growth is projected to remain in the 4–5 percent range, supported by Canal-related investment, improved connectivity, continued services expansion, and a gradual recovery in private investment and credit. Timely execution of key projects in the investment and budget plans will be important for realizing these prospects. At the same time, continued adherence to the fiscal path, which would place public debt on a gradual downward trajectory, is essential to sustain investor confidence, alongside reforms to improve productivity and the investment climate.
Risks to the outlook are broadly balanced, though uncertainty remains high. Weaker global growth or trade, tighter international financial conditions, and prolonged high fuel prices could weigh on activity, raise inflation, and put pressure on the fiscal and external positions. Domestically, fiscal slippages, social tensions, unresolved legal and arbitration issues related to Cobre Panamá and port concessions, and renewed drought conditions due to El Niño could weigh on confidence and growth. At the same time, stronger reform implementation, more efficient public investment execution, continued improvements in water management and greater resilience of canal operations, further development of Panama’s logistics and energy platforms, and a durable resolution of the Cobre Panamá issue could support higher investment, productivity, and growth than envisaged in the baseline.
Fiscal Policy — Rebuilding Buffers and Strengthening Fiscal Institutions
The fiscal adjustment achieved in 2025 was an important step toward preserving fiscal sustainability. The reported non-financial public sector deficit declined to 3.7 percent of GDP, below the 4 percent ceiling established under the SFRL, following expenditure restraint that more than offset revenue underperformance. Preliminary developments indicate that the authorities are on track to meet the 2026 deficit ceiling of 3.5 percent of GDP. Continued vigilance is needed given some weak spots in revenue performance and limited expenditure flexibility. Any temporary windfall from stronger Canal activity should be used to reduce debt accumulation rather than finance spending.
Continued adherence to the fiscal path is essential to reduce the public debt burden and preserve confidence. Staff supports the authorities’ objective of reducing the deficit to 3 percent of GDP in 2027 and to 1½ percent by 2030. Public debt is assessed as sustainable under the baseline with a moderate risk of sovereign stress, contingent on continued compliance with the fiscal path under the SFRL. The rapid increase in non-U.S. dollar borrowing requires prudent management of foreign currency and interest-rate risks.
Durable fiscal consolidation will require action on both revenue and expenditures. Panama’s tax ratio is low and has declined substantially over time. A comprehensive medium-term revenue strategy would provide a useful anchor for reform. Near-term efforts should focus on modernizing revenue administration, strengthening compliance-risk management, improving the use of third-party information, increasing the effectiveness of audits and collection, and reinforcing controls over invoices and tax credits. Over time, these measures should be complemented by reforms to broaden the VAT base, rationalize inefficient tax expenditures, and review the very low statutory VAT rate while addressing distributional effects.
Greater spending flexibility and enhanced prioritization and efficiency of spending would support a more growth-friendly adjustment. Statutory mandates, earmarking, and automatic salary increases constrain budget flexibility and can crowd out priority investment. Planned steps to reduce salary rigidities and better target subsidies, which can generate savings, are welcome. Institutionalizing systematic spending reviews, stronger public-investment management, and other public financial management reforms would help identify and generate savings while protecting essential public services and vulnerable households. The 2025 pension reform addressed the pension system’s near-term financing gap, but further parametric reforms will be needed to secure long-term sustainability, informed by the actuarial review envisaged under the amended law.
Strengthening the fiscal framework and public financial management would reinforce credibility and support more accountability in the use of public funds. The authorities are making progress through greater use of technology to enhance traceability and monitoring, advances in results-based budgeting, and implementation of IMF technical assistance recommendations on treasury management, fiscal statistics, and the reporting of the fiscal strategy and risks. Further efforts should focus on strengthening the medium-term macro-fiscal framework, improving the realism and reliability of macroeconomic and budget revenue projections, advancing the Organic Budget Law, and laying the foundations for a credible medium-term budget framework. Reforming the Panama Savings Fund to function more effectively as a macro-fiscal stabilization mechanism would also help rebuild buffers. Stronger commitment and cash controls, together with improved governance, monitoring, and reporting of arrears and other fiscal risks, would enhance budget execution. Bringing fiscal and debt statistics further into line with international standards, publishing consolidated public-sector financial statements and audited financial statements of state-owned enterprises, and operationalizing an independent Fiscal Council would further strengthen transparency and accountability.
Financial Sector Policy — Reinforcing Resilience in a Dollarized System
Panama’s banking system remains a source of resilience. Banks are well capitalized and profitable, nonperforming loans remain contained, and supervisory stress tests indicate resilience to plausible adverse scenarios. Nonetheless, continued supervisory vigilance is warranted, particularly with respect to construction, commercial real estate, preferential housing, and consumer lending exposures, provisioning practices, and the small number of banks requiring heightened supervisory attention.
