A new fiscal deficit ceiling

PANAMA - In Brief 03 Oct 2019 by Marco Fernandez
Yesterday, Héctor Alexander, the head of the Ministry of Economy and Finance (MEF) presented a bill of law at the national assembly in order to amend the deficit limit of 2.0% of GDP established by the Social Fiscal Responsibility Law (LRSF) back in October 2018. The proposed amendment would raise the fiscal deficit ceiling to 3.5% of GDP as of 2019. By 2022, the deficit limit would be lowered back to 2.0% of GDP. This bill is presented three months after the new government took office, employing a similar approach than previous governments looking to provide needed stimulus to the economy. However, from a fiscal standpoint the situation for this planning team is clearly more severe. The MEF had already announced weeks ago that with the actual size of the inherited deficit and less tax revenue coming in from a slowing economy activity, that they would not be able to stay below the 2% limit allowed by the current law. Given the fiscal and economic situation, we see this as the right approach at the time. We also don’t foresee that the government will have major problems financing these incremental deficits.

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