Economy and Trade
Panama has the highest GDP per capita in Central America, but nearly four in 10 of the population live in poverty. Services account for around 80% of Panama’s GDP and include the operation of the Panama Canal—the focal point of the economy. Offshore finance, manufacturing, a shipping registry and the Colon Free Zone, the second-largest free-trade zone in the world, also generate jobs and tax revenues. The country has become a centre for medical tourism, due to its large English-speaking population and modern facilities.
Panama was once considered the world’s premier tax haven. However, following military intervention by the United States in 1989 to remove former ally Manuel Noriega from power, the country has worked to rebuild its reputation as a safe haven for business, trusts, and shipping interests. The United States is the country’s principal trade partner, accounting for around a third of imports and exports. Panama signed a free-trade agreement with the United States in 2007. The US Congress is expected to ratify the agreement in 2009.
Economic Policy over 12 Months
Having instituted a number of reforms in the fiscal arena in recent years, the government took another major step forward to improve its fiscal management in 2008. A new Fiscal Responsibility Law (FRL), which sets a deficit limit of 1% of GDP for the non-financial public sector, excluding the Panama Canal Authority, and a debt target of 40% of GDP by 2015, was approved by the National Assembly in May 2009. The law will be tested in 2009, with general elections in May and a global downturn curbing revenues from the Panama Canal—which provided 22% of government income in 2007. The government says the 2009 budget has been framed to keep within the new 1% limit.
In January 2009, President Martin Torrijos presented a US$1.11 billion stimulus program intended to insulate Panama’s economy from the worst effects of the global downturn. The funds will be provided by the state-owned Banco Nacional de Panama, the Andean Development Corporation, and the Inter-American Development Bank. The funds will be used to extend loans to financial institutions, which will in turn be required to offer credit to businesses and individuals.
A key plank of the government’s long-term economic policy, a US$5.25 billion project to widen the Panama Canal, remained on track in 2008. The government anticipates that the project will transform Panama into a developed economy and will provide between 7,000 and 9,000 direct new jobs during the peak construction period of 2009–2011. The expansion is being financed through a combination of increased tolls and debt. The global financial crisis did not have any impact on funding for the project; in December 2008, four multilateral financial institutions and the Japan Bank for International Cooperation signed a US$2.3 billion loan deal to finance the Panama Canal expansion project.
Uniquely, Panama does not have a central bank or an independent monetary policy. The dollar is the country’s de facto currency. US dollar notes are legal tender in Panama, while the local currency, the balboa, is tied to and equal to the US dollar. The market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.
Economic Performance over 12 Months
Panama was one of the fastest-growing economies in the world in 2007, with real growth rising to 11.5%, following an average growth rate of nearly 8% in 2004–2006. The economy continued to expand at a rapid pace in 2008, growing by 9.2%, according to the government. However, the country has not remained immune from the global downturn—some independent analysts are forecasting growth of just 2.5% in 2009, largely due to a drop in tourism and earnings from offshore banking. The economy certainly slowed sharply in the final quarter of 2009, expanding at an annual rate of just 3.47% in November, down from 4.75% in October.
The government recorded a budget surplus equivalent to 0.4% of GDP in 2008, down from the 3.5% surplus reported in 2007, largely as a result of higher spending intended to counter the global financial crisis. Prior to the economic downturn, the government’s finances had improved significantly—the country recorded a budget deficit of around 5% of GDP in 2004. This improvement reflected fiscal reforms implemented by the government since 2004, the containment of current spending, favorable cyclical conditions, a surge in revenues from the Panama Canal, and one-off revenues.
The economic downturn has had a welcome impact on inflation. The country experienced significant inflationary pressures for much of 2008—Panama is a net importer of oil. Inflation averaged 8.7% in 2008, more than double the level seen in 2007 (4.2%). Furthermore, inflation reached a record high of 10% in September 2008. However, falling oil prices helped to subdue inflationary pressures in the latter stages of 2008. Indeed, by January 2009, Panama was experiencing deflation—consumer prices fell by 0.3% during the month, with the 12-month inflation rate falling to 4.9%.
Unemployment has fallen sharply in recent years, reaching unprecedentedly low levels—the jobless rate stood at 6.5% at the end of 2008, down from 7.8% in 2007 and above 15% in 2003. Unemployment is almost certain to rise in 2009 and probably in 2010, according to the employers’ group, the National Council of Private Enterprise, reflecting a slowdown in construction and port-related activities.
Support for Inward Investment and Imports
Panama encourages foreign investment in most sectors of the economy, but there are some remaining limits on foreign ownership in some areas. The fact that the dollar is the de facto currency enhances Panama’s appeal to foreign investors. For more information on the foreign investment climate, please see the website of the Ministry of Finance: www.mef.gob.pa/Portal/index.html
Panama maintains an essentially liberal trade (as well as investment) regime, characterized by relatively low tariffs and few non-tariff barriers. For information on the trade regime, please see the latest report published by the World Trade Organisation: www.wto.org/english/tratop_e/tpr_e/tp287_e.htm
Panama offers a wide range of exemptions and incentives to foreign investors. For more information, please see the website of the Ministry of Finance: www.mef.gob.pa/Portal/index.html
GDP growth: 9.2% (2008, government figures)
GDP per capita: $11,900 (2008 est.)
CPI: 8.7% (2008, government figures)
Key interest rate: 8.25% (31 December 2007)
Exchange rate versus dollar: balboas (PAB) per US dollar—1
Unemployment: 6.3% (2008 est.)
Current account deficit/surplus −US$2.536 billion (2008 est.)
Population: 3,309,679 (July 2008 est.)
Source: CIA World Factbook except where stated