IMF foresees slowdown in Panama due to closure of First Quantum mine

The IMF predicts Panama’s economic growth will slow in 2024 to 2.5% after expanding 7.3% last year, largely as a result of the closure of First Quantum's Cobre Panamá mine at the end of November. 

“The mine contributed, directly and indirectly, about 5% of Panama’s GDP. Growth in the non-mining sector is likely to slow as well, as the strong rebound from the pandemic has likely run its course and Panama faces higher financing costs,” the multinational said after its executive board concluded the article IV consultation with the country.

Although last year the government and the subsidiary of Canada’s First Quantum, Minera Panamá, reached a new agreement after the copper-gold mine’s original operating contract was declared unconstitutional in 2017, thousands of protesters demonstrated against the new contract for mainly environmental reasons.

In late November, the supreme court revoked the new contract, leading to an order to close the open pit mine.

“The near-term economic outlook is subject to a large degree of uncertainty and the balance of risks is tilted to the downside,” the IMF said in its report. “Key risks include the loss of investment grade, further social unrest, the fallout from the end of copper production (including from international arbitration proceedings), and external risks.” 

In the medium term, the IMF expects GDP to grow around 4%, although “subject to considerable uncertainty, as construction and investment are unlikely to provide the same support as they did before the pandemic.”

The multilateral’s board of directors said in its assessment that although Panama has recovered strongly from the COVID-19 pandemic, growth will decrease this year.

“Being a dollarized economy adds to the importance of maintaining fiscal sustainability and financial stability,” the board said.

However, it noted that the Central American country has made significant progress in reducing its fiscal deficit. The fiscal deficit decreased from 10% in 2020 to 3% of GDP in 2023, although also helped by exceptional sources of revenue.

“Meeting the 2024 fiscal deficit target of 2.0% of GDP will require an unduly large compression of public investment. A fiscal deficit of 4% of GDP in 2024 would be adequate from a cyclical perspective, avoiding an overly large investment compression and allowing a more gradual adjustment to the permanent loss of fiscal revenues from Minera [Panamá],” the IMF added.

To ensure that public debt remains on a firm downward trend, the public finance strategy for 2025 must contain a credible multi-year fiscal consolidation plan to reduce the deficit to the social and fiscal responsibility law target of 1.5% of GDP by 2027, according to the board.

“Without a credible plan, the risk of further sovereign downgrades is high, which would increase financing costs and exacerbate possible adverse debt dynamics,” it said.