- The economy is recovering from the impact of the Cobre Panamá mine closure. GDP growth is projected to increase to 4.5 percent in 2025 as the impact of the mine closure diminishes and non-mine economic sectors continue to grow.
- Post-pandemic inflationary pressures have abated. Inflation has turned negative, dropping to -0.2 percent year-on-year at the end of 2024 and further down to -0.7 percent year-on-year by May 2025.
- Full implementation of the spending reduction plan approved by the cabinet would bring the 2025 fiscal target within reach.
- The pension reform is a welcome adjustment that addresses the financial shortfalls of the defined benefit scheme.
WASHINGTON, USA – The executive board of the International Monetary Fund (IMF) completed the Article IV Consultation for Panama. The authorities have consented to the publication of the staff report prepared for this consultation.
GDP growth slowed from 7.3 percent in 2023 to 2.9 percent in 2024, mainly due to the closure of the Cobre Panamá copper mine. The mine directly and indirectly accounted for about 5 percent of GDP and 2 percent of employment. Unemployment increased from 7.4 percent in August 2023 to 9.5 percent in October 2024. However, spillovers to the rest of the economy appear to have been limited. Non-mining GDP growth accelerated in the course of 2024 as the services sector continued its post-pandemic boom.From the expenditure side, strong capital formation has been driving growth.
Following the 2023-24 transit restrictions caused by the El Niño-triggered drought, the Panama Canal returned to operating at full capacity in September 2024. Inflation has declined sharply from its mid-2022 peak, to 0.2 percent year-on-year at end-2024, and has since turned negative, reaching -0.7 percent year-on-year in May 2025. Despite prompt corrective measures by the government that came into office in July 2024, the 2024 fiscal deficit reached 7.4 percent of GDP, up from a revised 3.9 percent of GDP in 2023. Taking into account one-off factors, accounting changes and the impact of the economic cycle, the deterioration in the underlying fiscal balance is estimated at 0.8 percentage points of GDP.
The economy is expected to continue its recovery, but the outlook is subject to significant downside risks and a high degree of uncertainty. GDP growth is projected to increase to 4½ percent in 2025 as the impact of the mine closure dissipates. Non-mining GDP growth is expected to decelerate due to fiscal consolidation, but overall GDP growth will increase due to base effects.
Over the medium term, GDP growth is projected at about 4 percent per annum. This is lower than during the pre-pandemic boom years, as the construction sector and associated FDI inflows are unlikely to provide a similar contribution as during those years, and growth in the employment to population ratio is expected to slow. Downside risks to the outlook include the loss of investment-grade status, delays in implementing the reform agenda, natural disasters, and heightened global policy uncertainty. On the upside, successful implementation of the government’s ambitious reform package—including ongoing mine negotiations—could bolster the outlook.
Executive board assessment
Executive directors agreed with the thrust of the staff appraisal. They welcomed that Panama’s vibrant private sector and sound economic policies have led to a rapid convergence of its income level with that of advanced economies. Private sector imbalances have been modest, and inflation has been low and stable. While welcoming the rebound in Panama’s economy from the closure of the Cobre Panamá mine, Directors considered that downside risks remain significant amid high global policy uncertainty and emphasized that being a dollarized economy adds to the importance of maintaining fiscal sustainability and financial stability.
Directors concurred that the government’s fiscal targets embedded in the revised Social and Fiscal Responsibility Law path to reduce the non‑financial public sector fiscal deficit to 2 percent of GDP by 2029 are appropriate. They welcomed the spending reduction plan approved by the cabinet to meet the 2025 fiscal target and encouraged its full implementation. Directors considered that the authorities’ strategy to revisit spending mandates and commitments would enhance budget flexibility and capacity to absorb shocks and pursue new priorities.
Directors agreed that the pension reform is a welcome adjustment that addresses the financial shortfalls of the defined benefit scheme and improves Panama’s social safety net. They noted that further adjustments of the pension system will be needed in the future to ensure long‑term sustainability.
Directors agreed that while the banking system remains sound, well capitalized and liquid, further improvements are needed to the bank resolution framework. They welcomed the authorities’ consideration of a financial safety net and their progress in implementing key recommendations from the 2023 FSAP, as well as the continued commitment to implementing effectively the AML/CFT standards.
Directors concurred that further improvements in governance and education are important. Addressing income inequality requires targeted interventions in rural areas, focusing on infrastructure and education to reduce disparities with urban regions. Directors noted that ongoing efforts to improve the availability of macro‑financial data will support transparency and policy making and encouraged the authorities to continue working toward SDDS subscription.
It is expected that the next Article IV consultation with Panama will be held on the standard 12‑month cycle.
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