The Legislative Assembly (Diputados) approved the new Fiscal Responsibility Law (FRL) and President Varela signed it today

PANAMA - In Brief 10 Oct 2018 by Marco Fernandez

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After a long tug-of-war between the Ministry of Economy and Finance (MEF) and the Diputados, the new FRL was approved yesterday. The new fiscal architecture follows the pattern presented by the MEF in mid-year and discussed in our previous issue:1. The adjustment to the deficit (related to Panama Canal transfers to the Central Government) disappears right away. The net deficit will not be adjusted in the future.2. The new limit to the NFPS deficit will be 2.0% of GDP in 2018; 1.75% in 2019-2020 and 1.5%, thereafter.3. The MEF argues that this new ceiling will provide around $US 300 million to the Government to “stimulate the economy”. Our numbers do not coincide with theirs. By June the unadjusted deficit reached 1.6% of GDP (calculated at a 4.2% growth rate for the year…maybe a little bit to high). Assuming no further deficits in the second half of the year, the 2% cap will only allow for $US 260 million (0.4% of GDP) of additional spend, again, assuming zero deficit after June.As a counterbalance for this approval, the Diputados promised to reject the MEF budget unless there is a substantial increase in the funds transferred to the Assembly (around US$ 20 million of additional funds). The MEF will abide spite of severe criticism by the media and local analysts.The second part of the legislation refers to the policy of expenditures control starting in 2019: the current operating expenditures of the NFPS will not surpass the growth of potential GDP (calculated by the Controller office at 5.5%) plus inflation, except for health care expenses, pensions and interest on the debt. The rule of accumulation for the Panama Savings Fund (FAP) had its floor of 3.5% of GDP reduce...