Panama Economy

Panama Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax System

Basic data

According to cheeroutdoor.com, Panama has been Latin America’s fastest growing economy for the past two decades. However, due to its unique position in international trade, it has been disproportionately affected by the severe economic downturn caused by the COVID pandemic. With a year-on-year drop of 17.9% of GDP, it is the third most affected economy in Latin America. Unemployment climbed from 6.9% in 2019 to 20% at the end of 2020. The country’s economic recovery will depend mainly on the revival of international trade, tourism and new investments in copper mining. The development of the American economy, with which Panama’s is closely linked thanks to the bilateral free trade agreement and through the US dollar, which functions as a parallel currency in the country, will also play a big role. The country remains economically open and maintains low interest rates.

Despite its relatively small population (4.17 million), Panama’s economy is the second largest in Central America and has one of the highest GDP per capita in the wider Latin American region. Panama occupies a unique position in the world economy and geopolitics thanks to the Panama Canal. On the north-south axis, the country fulfills the role of a logistics hub between North and South America and an even more important role as a strategic maritime transport artery connecting the Caribbean and the Pacific. Thanks to this, a wide variety of maritime transport services, as well as financial, commercial or real estate services, are concentrated in Panama. A significant source of income for Panama is the registration of ships. Thanks to extremely liberal ship registration laws and low registration fees, almost 50% of all merchant vessels in the world are registered under the Panamanian flag. Japan, Hong Kong, Greece and Korea mainly use the possibility to register their ships in Panama. There are currently around 11,000 ships flying the Panamanian flag. In addition, there is a developed tourism infrastructure in Panama. In the structure of the Panamanian economy, the service sector has a dominant share, accounting for more than 75% of GDP. A prominent role in the country’s economy is also played by the Colón Special Economic Zone – the largest free trade zone on the American continent and the second largest in the world. In Panama, monetary stability resulting from the use of the dollar alongside the national currency balboas also contributes to the good economic situation.

Pointer 2018 2019 2020 2021 2022
GDP growth (%) 3.6 3.0 -18.0 11.0 8.0
GDP/population (USD/PPP) 31,725.6 32,850.0 27,030.0 30,030.0 32,560.0
Inflation (%) 0.8 -0.4 -1.6 0.3 0.8
Unemployment (%) 6.0 6.9 20.0 13.0 9.0
Export of goods (billion USD) 14.8 14.4 13.7 14.4 14.3
Import of goods (billion USD) 24.0 22.3 15.6 20.1 21.6
Trade Balance (Billion USD) -9.2 -7.9 -1.8 -5.7 -7.3
Industrial production (% change) 2.6 3.4 -31.0 17.0 9.9
Population (millions) 4.2 4.3 4.3 4.4 4.5
Competitiveness 64/140 66/141 ON ON ON
OECD export risk 3/7 4/7 4/7 4/7 ON

Source: EIU, OECD, WEF

Public finance and state budget

Public finance
State budget balance (% of GDP) -7.0
Public debt (% of GDP) 69.4
Current account balance (billion USD) -2.9
Taxes
AFTER 25%
F.O 0 – 25%
VAT basic rate 7%

In 2020, public debt increased dramatically to nearly 70% of GDP. The government will therefore have to focus on fiscal consolidation in the next period. However, the room for maneuver to increase government revenue is very limited, and the current administration of President Cortiz has declared that it does not intend to increase the tax burden on businesses or households. The government’s new target is to limit the deficit to 7.5% of GDP in 2021, 4% in 2022, 2% in 2023-24 and 1.5% in 2025. The 2021 ambition appears realistic as opposed to ambitious medium term. The development of fiscal consolidation will largely depend on revenues from two key sources – the Cobre Panamá copper mine and the Panama Canal. These, in turn, will be closely related to the development of the world economy.

Banking system

Along with London and New York, Panama City is one of the most important financial centers in the world. The country’s economy is fully dollarized. Domestic interest rates are primarily influenced by monetary developments in the US. The use of the dollar in monetary relations, together with favorable tax conditions and a liberal trade policy, make Panama very attractive for carrying out large-scale financial transactions. The center of the Panamanian financial system, which contributes about 11% to the GDP, is the so-called International Banking Center. Thanks to favorable conditions, more than 110 foreign banks have established their regional branches in Panama. A total of 24 banks have established branches directly in the Colón Free Trade Zone.

Banco Nacional De Panama – the largest bank in the country, owned by the state; is responsible for supplying US dollars from the US FED; thanks to the dense infrastructure and the wide portfolio of financial products, it is probably the most suitable bank for residents

Caja De Ahorros – the second of the state banks with a long history, good credibility and a wide range of financial products

Citibank Panama – the national branch of the banking giant Citigroup, however, its presence in the country dates back to the time of the construction of the canal

Tax system

In February 2020, the EU added Panama to the blacklist of countries that are considered non-cooperative tax jurisdictions (so-called tax havens), and in February 2021 the European Commission confirmed that Panama remains on the list. She justified her decision by the insufficient progress of the Panamanian government in implementing measures to improve the situation, to which it committed itself in the past period. The same assessment of Panama’s tax policy and anti-money laundering measures comes from the OECD.

Only income from business activities in the territory of Panama or the sale of products and services to persons or companies in Panama are considered taxable. The tax rate for legal entities is 25%. If the government of Panama owns 40% or more of the company’s capital, it is required to pay 30%. The tax calculation is standard (multiplying net taxable income and the tax rate), but for companies with taxable income greater than $million, a different calculation is used. Its value is the higher value from the comparison between the traditional calculation and the taxable income multiple of 4.67%. Individuals who earn less than $11,000 a year do not pay income tax. Individuals with incomes between $11,001 – $50,000 are taxed at a rate of 15% and income above $50,000 is taxed at a rate of 25%. Foreigners who stay in Panama for more than 183 days a year and have income, they must pay taxes in the same way as local residents. The standard VAT rate is 7%, with special rates of 10% for accommodation and alcohol and 15% for tobacco. Exemptions from the payment of VAT apply to food, medicine, medical services and oil.

One of the central points of the government’s program is to strengthen the rule of law and transparent state administration and to rid Panama of the “sticker” of a tax haven. However, the government has so far failed to fulfill either of them.

Panama Economy