Economy of Panama

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Economy of Panama
Panama City seafront.jpg
Panama City is the capital and financial center of Panama
Currency Panamanian balboa (PAB, B/.)
U.S. Dollar
Calendar year
Trade organizations
SICA
Statistics
GDP Decrease2.svg$44.69 billion (2014 est. PPP)
GDP rank92nd (2012, PPP)
GDP growth
5.6% (2015), 5% (2016),
5.4% (2017e), 5.6% (2018f) [1]
GDP per capita
Increase2.svg$20,300 (2014 est.)
GDP by sector
agriculture: 3.8%; industry: 16.8%; services: 79.4% (2012 est.)
Increase2.svg5.4% (2012 est.)
Population below poverty line
26% (2012 est.)
52.4 (2008)
Labor force
1.563 million (2014 est.) note: shortage of skilled labor, but an oversupply of unskilled labor
Labor force by occupation
agriculture: 17%; industry: 18.6%; services: 64.4% (2009 est.)
UnemploymentIncrease2.svg4.5% (2014 est.)
Main industries
construction, brewing, cement and other construction materials, sugar milling
79th (2019) [2]
External
ExportsIncrease2.svg$18.07 billion (2014 est.)Note: includes the Colon Free Zone
Export goods
gold, bananas, shrimp, sugar, iron and steel waste, pineapples, watermelon
Main export partners
Flag of the United States.svg  United States 24.7%
Flag of Canada (Pantone).svg  Canada 16.2%
Flag of Europe.svg  EU 15.1%
Flag of Costa Rica.svg  Costa Rica 8.8%
Flag of the Netherlands.svg  Netherlands 5.7%
Flag of Hong Kong.svg  Hong Kong 5.2% (2014 est.) [3]
ImportsIncrease2.svg$25.65 billion (2014 est.)
Import goods
fuel products, medicines, vehicles, iron and steel rods, cellular phones
Main import partners
Flag of the United States.svg  United States 20.9%
Flag of the People's Republic of China.svg  China 14.8%
Flag of Mexico.svg  Mexico 13.6%
Flag of Costa Rica.svg  Costa Rica 10.6%
Flag of Venezuela.svg  Venezuela 8.1%
Flag of Colombia.svg  Colombia 5.8% (2014 est.) [4]
Increase2.svg$15.47 billion (31 December 2014 est.)
Public finances
Decrease2.svg37.0% of GDP (2012 est.)
Revenues$9.219 billion (2012 est.)
Expenses$10.21 billion (2012 est.)
Standard & Poor's: [5]
BBB (Domestic)
BBB (Foreign)
AAA (T&C Assessment)
Outlook: Stable [6]
Moody's: [6]
Baa2
Outlook: Stable
Fitch: [6]
BBB
Outlook: Positive
Foreign reserves
Increase2.svg$3.314 billion (31 December 2012 est.)
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars.
Macroeconomic indicators
GDP (PPP)40.152 billion USD (2009)
GDP (Nominal)25 billion USD (2008) [7]
GNP 38.08 billion USD (2008)
GDP growth8.4% (2013)
GDP per capita12,600 USD
GNI per capita10,700 USD (2013)
HDI Increase2.svg0.840

The economy of Panama is a fully dollarized [8] economy with a history of low inflation. It is based mainly on the services industry, heavily weighted toward banking, commerce, and tourism.

An economy is an area of the production, distribution, or trade, and consumption of goods and services by different agents. Understood in its broadest sense, 'The economy is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the production, use, and management of resources'. Economic agents can be individuals, businesses, organizations, or governments. Economic transactions occur when two parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. However, monetary transactions only account for a small part of the economic domain.

Panama Republic in Central America

Panama, officially the Republic of Panama, is a country in Central America, bordered by Costa Rica to the west, Colombia to the southeast, the Caribbean Sea to the north, and the Pacific Ocean to the south. The capital and largest city is Panama City, whose metropolitan area is home to nearly half the country's 4 million people.

Contents

Panama's economy is based primarily on a services sector that accounts for nearly 80% of its GDP. Services include the Panama Canal, banking, the Colón Free Trade Zone, insurance, container ports, and flagship registry, medical and health, and other business. The country's industry includes, manufacturing of aircraft spare parts, cements, drinks, adhesives, and textiles. Also some exports for Panama are bananas, shrimp, sugar, coffee, and clothing.

Panama Canal Large artificial waterway in the Republic of Panama, connecting the Atlantic and Pacific Oceans

The Panama Canal is an artificial 82 km (51 mi) waterway in Panama that connects the Atlantic Ocean with the Pacific Ocean. The canal cuts across the Isthmus of Panama and is a conduit for maritime trade. Canal locks are at each end to lift ships up to Gatun Lake, an artificial lake created to reduce the amount of excavation work required for the canal, 26 m above sea level, and then lower the ships at the other end. The original locks are 34 m wide. A third, wider lane of locks was constructed between September 2007 and May 2016. The expanded canal began commercial operation on June 26, 2016. The new locks allow transit of larger, post-Panamax ships, capable of handling more cargo.

Colón Free Trade Zone

The Colón Free Trade Zone is a large entity near the Atlantic entrance to the Panama Canal, located in Panama dedicated to re-exporting a wide variety of merchandise to Latin America and the Caribbean. It is a free port.

Economic history

Since the early 16th century, Panama's geographic location has given the country a comparative advantage. Soon after the Spanish arrived, the conquistadors would transport gold and silver from Peru to Spain via the Panama isthmus. Ports on each coast and a trail between them handled much of Spain's colonial trade from which the inhabitants of the port cities prospered. The country has always been dependent on world commerce for its prosperity and imports. Agriculture received little attention until the 20th century, and by the 1980s had for most of the population barely developed beyond indigenous Indian techniques. Industry developed slowly because the flow of goods from Europe and later from North America created a disincentive for local production. [9]

Panama has been affected by the cyclical nature of international trade. The economy stagnated in the 18th century as colonial exchange via the isthmus declined. In the mid-19th century, Panama's economy boomed as a result of increased cargo and passengers associated with the California gold rush. A railroad across the isthmus, completed in 1855, prolonged economic growth for about fifteen years until completion of the first transcontinental railroad in the United States led to a decline of trans-isthmian traffic. France's efforts to construct a canal across the isthmus in the 1880s and efforts by the United States in the early 20th century stimulated the Panamanian economy. [9] In 1903 Panama separated from Colombia and the United States took control of the Panama Canal Zone; soon afterwards a constitutional ruling adopted the US dollar as legal tender for the country. [10]

Panama Canal Zone Former unincorporated territory of the United States surrounded by the Republic of Panama

The Panama Canal Zone was an unincorporated territory of the United States from 1903 to 1979, centered on the Panama Canal and surrounded by the Republic of Panama. The zone consisted of the canal and an area generally extending five miles (8.0 km) on each side of the centerline, excluding Panama City and Colón, which otherwise would have been partly within the limits of the Zone. Its border spanned three of Panama's provinces. When reservoirs were created to assure a steady supply of water for the locks, those lakes were included within the Zone.

Currency substitution Use of a foreign currency in parallel to or instead of a domestic currency

Currency substitution or dollarization is the use of a foreign currency in parallel to or instead of the domestic currency.

The United States completed the canal in 1914 [11] , and canal traffic expanded by an average of 15% a year between 1915 and 1930. The stimulus was strongly felt in Panama City and Colón, the terminal cities of the canal. However, the world depression of the 1930s reduced international trade and canal traffic, causing extensive unemployment in the terminal cities and generating a flow of workers to subsistence farming. During World War II, canal traffic did not increase, but the economy boomed as the convoy system and the presence of United States forces, sent to defend the canal, increased foreign spending in the canal cities. The end of the war was followed by an economic depression and another movement of unemployed people into agriculture. The government initiated a modest public works program, instituted price supports for major crops, and increased protection for selected agricultural and industrial products. [9]

World War II 1939–1945 global war

World War II, also known as the Second World War, was a global war that lasted from 1939 to 1945. The vast majority of the world's countries—including all the great powers—eventually formed two opposing military alliances: the Allies and the Axis. A state of total war emerged, directly involving more than 100 million people from over 30 countries. The major participants threw their entire economic, industrial, and scientific capabilities behind the war effort, blurring the distinction between civilian and military resources. World War II was the deadliest conflict in human history, marked by 50 to 85 million fatalities, most of whom were civilians in the Soviet Union and China. It included massacres, the genocide of the Holocaust, strategic bombing, premeditated death from starvation and disease, and the only use of nuclear weapons in war.

The postwar depression gave way to rapid economic expansion between 1950 and 1970, when GDP increased by an average of 6.4% a year, one of the highest sustained growth rates in the world. All sectors contributed to the growth. Agricultural output rose, boosted by greater fishing activities (especially shrimp), the development of high-value fruit and vegetable production, and the rapid growth of banana exports after disease-resistant trees were planted. Commerce evolved into a relatively sophisticated wholesale and retail system. Banking, tourism, and the export of services to the Canal Zone grew rapidly. Most importantly, an increase in world trade provided a major stimulus to use of the canal and to the economy. [9]

In the 1970s and 1980s, Panama's growth fluctuated with the vagaries of the world economy. After 1973, economic expansion slowed considerably as the result of a number of international and domestic factors. Real GDP growth averaged 3.5% a year between 1973 and 1979. In the early 1980s, the economy rebounded with GDP growth rates of 15.4% in 1980, 4.2% in 1981, and 5.6% in 1982. The acute recession in Latin America after 1982, however, wreaked havoc on Panama's economy. GDP growth in 1983 was a mere 0.4%; in 1984 it was -0.4%. [9]

This period coincided with the rise to power of General Manuel Noriega during which Panama became increasingly indebted, by 1986 owing SDR284m (US$360m) to the IMF alone, 278% of their quota. [12] This led to the IMF imposing an adjustment program supported by an IMF stand-by arrangement in 1985–87 [12] whilst the economy recovered somewhat. In 1985 Panama experienced economic recovery with 4.1% GDP growth. The corresponding figure for 1986 was estimated to be 2.8%. [9]

The United States started to pursue Noriega for fostering a narco-state in Panama, culminating in sanctions that froze Panama's assets in the United States; since Panama used the US dollar it was forced to default on its IMF debt on 28 December 1987. [12] Economic turmoil in the country included a general strike and the banking system closing down for two months. [12] Panama made a token payment the day before the IMF meeting in November 1988, but the situation did not resolve until 1989. [12] Presidential elections in May 1989 were condemned by the international community as fraudulent and the IMF began to become impatient with Panama's increasing arrears which had now reached SDR121m (US$150m). [12]

The United States and Germany forced through a resolution on 30 June 1989 declaring Panama ineligible for further support from the IMF. [12] The situation was eventually resolved by the US invasion of Panama in December 1989 which forced the surrender of Noriega. [12] SDR181.5m (~$US230m) was still owed to the IMF in April 1990; the country regained access to IMF funds on 2 May 1992. [13]

A proportional representation of Panama's exports. Panama Export Treemap.png
A proportional representation of Panama's exports.

After taking office in 1994 President Ernesto Perez Balladares set forth an economic liberalization program designed to liberalize the trade regime, attract foreign investment, privatize state-owned enterprises, institute fiscal discipline and privatize its two ports in 1997 and approve the sale of the railroad in early assets. Panama joined the World Trade Organization (WTO) and a banking reform law was approved by the legislature in early 1998 and dismantled the Central bank. After two years of near stagnation the reforms began to take root; GDP grew by 3.6% in 1997 and grew by more than 6% in 1998. The most important sectors which drove growth were the Panama Canal and the shipping and port activities of the Colón Free Trade Zone which also rebounded from a slow year in 1996.

On September 1, 1999, Mireya Moscoso, the widow of former President Arnulfo Arias Madrid, took office. During her administration, Moscoso attempted to strengthen social programs, especially for child and youth development, protection, and general welfare. Moscoso's administration successfully handled the Panama Canal transfer and was effective in the administration of the Canal.

The PRD's Martin Torrijos won the presidency and a legislative majority in the National Assembly in 2004. Under Torrijos, Panama continued strong economic growth and initiated the Panama Canal expansion project that began in 2007 and was opened to commercial traffic on 26 June 2016, at a cost of US$5.25 billion - about 25% of current GDP. [14] The canal expansion doubled the waterway capacity, enabling it to accommodate Post-Panamax ships that were too large to transverse the transoceanic crossway, [14] and expected to help to reduce the high unemployment rate. Strong economic performance had reduced the national poverty level to 29% in 2008.

In 2008, Panama had the second most unequal income distribution in Latin America. The Torrijos government implemented tax reforms, as well as social security reforms, and backed regional trade agreements and development of tourism. Not a CAFTA signatory, Panama in December 2006 independently negotiated a free trade agreement with the US, which, when implemented, should help promote the country's economic growth.

In May 2009, Ricardo Martinelli elected president, and on July 1 promised to promote free trade, establish a Panama City metro system at an approximate cost of $1.0 billion, [15] reform the health care system, and complete the expansion plan for the Panama Canal. Martinelli also emphasized the importance of transforming Panama into a “safer, modern and supportive” nation devoted to improving the living conditions of its population through efficient and accountable governance.

Economic sectors

Financial services

Panama has a substantial financial services sector and no central bank to act as a lender of last resort to rescue banks that get in trouble. As a result, Panamanian banks are very conservatively run, with an average capital adequacy ratio of 15.6% in 2012, nearly double the legal minimum. [16] The sector grew up providing trade finance for trade passing through the Canal, and later evolved into money laundering for the drug trade under Noriega. Since the global financial crisis of 2007–08 the country has been trying to shake off its reputation as a tax haven, signing double taxation treaties with many (mostly OECD) countries and in April 2011 a treaty on the exchange of financial information with the United States. [16]

Agriculture

An economic activity map of Panama, 1981. Panama econ 1981.jpg
An economic activity map of Panama, 1981.

Major agricultural products include bananas, cocoa beans, coffee, coconuts, timber, beef, chickens, shrimp, corn, potatoes, rice, soybeans, and sugar cane. [17] In 2009 agriculture and fisheries made up 7.4% of Panama's GDP [17]

Panama is a net food importer and the United States is its main supplier. [18] Agriculture employs a large number of Panamanians (in relation to agriculture's percentage of Panamanian GDP) with many farmers being engaged in subsistence farming.

Taxation

Taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself. [19] The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation.

In February 2005, Panama’s unicameral legislature approved a major fiscal reform package in order to raise revenues from new business taxes, and increases the country’s level of debt. The legislature voted 46 to 28 in favour of the measures, which include a new 1.4% tax on companies’ gross revenues, and a 1% levy on firms operating in the Colon Free Trade Zone – the largest free port in the Americas.

Further reforms

President Ricardo Martinelli had promised to implement a flat tax system with a flat tax of 10% and which promised to raise revenues, put inflation under control and which will allow enormous real wage gains.[ citation needed ] Instead the Martinelli government increased sales tax to 7% from 5%, as well as increasing other taxes, in order to finance many infrastructure projects around the country.

Transportation

Panama City as seen from the Corredor Sur highway. Panama City from airport.JPG
Panama City as seen from the Corredor Sur highway.

In Panama City there are six highways: the Panama-Arraijan Bridge of the Americas, Panama-Arraijan Centennial Bridge, Arraijan-Chorrera, Corredor Norte, Corredor Sur, and Autopista Alberto Motta.

Panama's roads, traffic and transportation systems are generally safe, with older traffic lights having undergone a recent overhaul and most have been replaced by traffic lights that are capable of being controlled [and changed] remotely, even at busy intersections where they are not needed. Driving during the midday is usually slow and demanding due to dense traffic, frequent traffic jams, and street renovation programs. On roads where poor lighting and driving conditions prevail, night driving is difficult and in many cases, restricted by local authorities, this usually occurs in informal settlements. Night driving is particularly hazardous in these areas. [20] Traffic in Panama moves on the right, and Panamanian law requires that drivers and passengers wear seat belts. [20]

Currently, Panama used to have an extensive and efficient, yet confusing to tourists, form of public transportation consisting of colorful painted buses colloquially known as diablo rojo. A diablo rojo is usually "customized" or painted with bright colors, usually depicting famous actors, politicians or singers. It is now popular all over the city (and also in neighboring towns) for bus drivers to personally customize the interior and exterior of their diablo rojo. Panama City's streets experience frequent traffic jams due to poor planning.

"Diablos Rojos" are not in Panama transportation since 2010. Metrobus and the Metro are the current transportation.

Statistics

The following table shows the main economic indicators in 1980–2017. [21]

Year198019851990199520002005200620072008200920102011201220132014201520162017
GDP in $
(PPP)
7.32 Bln.11.18 Bln.12.61 Bln.18.59 Bln.26.47 Bln.36.71 Bln.41.07 Bln.47.27 Bln.52.36 Bln.53.61 Bln.57.38 Bln.65.48 Bln.72.85 Bln.78.93 Bln.85.20 Bln.91.10 Bln.98.87 Bln.103.89 Bln.
GDP per capita in $
(PPP)
3,6935,0245,0976,7678,70410,95612,03213,60014,79914,89016,10417,58519,23420,49821,77222,91723,99525,351
GDP growth
(real)
4.5 %11.2 %8.1 %1.8 %2.7 %7.2 %8.5 %12.1 %8.6 %1.6 %5.8 %11.8 %9.1 %6.6 %6.0 %5.8 %5.0 %5.4 %
Inflation
(in Percent)
13.8 %1.0 %0.8 %0.9 %1.4 %2.9 %2.5 %4.2 %3.8 %2.4 %3.5 %5.9 %5.7 %4.0 %2.6 %0.1 %0.7 %0.9 %
Government debt
(Percentage of GDP)
.........81 %56 %62 %8 %48 %41 %40 %39 %38 %34 %34 %36 %37 %37 %38 %


Nominal GDP per capita in Panama was (in balboas or US dollars) 11,691 in 2002, 13,099 in 2004, 14,004 in 2005 (Prelim), 15,141.9 in 2006 (est), as reported by Office of Statistics and Census, Government of Panama. [22] Growth from 2002 to 2006 was especially strong in the transport and communications sector, which became the biggest component of GDP, although many sectors also saw strong growth. Real GDP rose 7.5% (03-04), 6.9% (04-05), 8.1% (05-06). [23]

GDP growth in 2008 was 9.2%, reflecting a slowing of the robust growth of 11.5% seen in 2007. Although growth slowed to 2.4% in the first half of 2009, due to the global economic downturn, it is expected to improve in 2010 and is still one of the most positive growth rates in the region. Growth has been fueled by the construction sector, transportation, port and Panama Canal-related activities, and tourism. As a result of this growth, government deficit as a percentage of GDP dropped to 43% in 2009, and government-issued debt achieved investment grade in February 2010. [24] A recent United Nations report highlighted progress in poverty reduction from 2001 to 2007—overall poverty fell from 37% to 29%, and extreme poverty fell from 19% to 12%. However, Panama still has the second-most unequal income distribution in Latin America. [25]

See also

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The economy of Central America is the eleventh-largest economy in Latin America, behind Brazil, Mexico, Argentina, Chile and Colombia, According to the World Bank, the nominal GDP of Central America reached 204 billion US dollar in 2010, as recovery from the crisis of 2009, where gross domestic product (GDP) suffered a decline to 3.8%. The major economic income are the agriculture and tourism, although the industrial sector is in strong growth, mainly in Panama.

References

PD-icon.svg This article incorporates  public domain material from the CIA World Factbook website https://www.cia.gov/library/publications/the-world-factbook/index.html .

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  16. 1 2 PD-icon.svg This article incorporates  public domain material from the United States Department of State document "Background note: Panama" .
  17. PD-icon.svg This article incorporates  public domain material from the United States Department of Agriculture document "Panama: Biotechnology: Biotechnology Report" by Hugo Salazar.Retrieved on August 7, 2007.
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