By Sandeep Wasnik
Panama, a Central American country is located between Colombia and Costa Rica and borders both the Caribbean Sea and the Pacific Ocean. It is the epicentre of the Western Hemisphere. Panama’s topography is incredibly varied, featuring more than 1,600 islands, mountains, rainforests, and beautiful white sand beaches. The nation is home to the Panama Canal, one of the world’s most significant trading routes, also home to 4.46 million people and is currently 128th in the world in terms of population.
Panama Economy and Inflation:
Panama has a relatively high standard of living for a Central American country, with a per capita GDP of US$15,643 (PPP) in 2023, also classified by the World Bank as an upper-middle-income country. Despite this, poverty and inequality are still endemic throughout Panama.
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The service industry accounts for more than 80 percent of the GDP of Panama, making the country’s economy service oriented. Around 10 percent of GDP and 20 percent of government revenue are generated by the Panama Canal, which is the main driver of the country’s economy. Tourism, shipping, finance, and insurance are some of the other significant industries in Panama. In comparison with the same quarter in the previous year, Panama’s Gross Domestic Product (GDP) increased by 9.50 percent in the third quarter of 2022.
After contracting by 17.7 percent in 2020 because of the COVID-19 epidemic, the Panamanian economy grew by 15.8 percent in 2021 and 10.8 percent in 2022. Construction, transportation and logistics, tourism, and mining will be the main drivers of the economy’s 6.3 percent predicted growth in 2023. After adjusting for purchasing power parity (PPP), the GDP per capita of Panama was last measured in 2022 at US$33266.48. Panama’s GDP per capita is equal to 187 percent of the global average.
Most Latin American markets have seen inflation in recent months, primarily due to the increase in US interest rates that have resulted in formerly unusual dollar prices. According to the National Institute of Statistics and Census (INEC), Panama’s inflation rate rose from 2.20 percent in August 2023 to 2.31 percent in September. From 2008 to 2023, Panama’s inflation rate averaged 2.51 percent; it peaked in September 2008 at 10.04 percent and fell to a record low of -2.50 percent in May 2020.
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In comparison to other Latin American countries, Panama’s inflation outlook is quite moderate. However, in order to limit the impact of inflation on people and the economy, the government and businesses must remain watchful. The primary causes of Panama’s inflation, Price increases for food and energy, a rise in demand for products and services as the economy bounces back from the COVID-19 epidemic, and supply chain interruptions brought on by the conflict in Ukraine.
To combat the effects of inflation, the Panamanian government has implemented a number of measures, like granting fuel subsidies to individuals and companies, lowering trade barriers and making infrastructure investments to increase the supply of products and services.
Panama Canal:
The Panama Canal is a major economic driver for Panama, generating billions of dollars in revenue each year. It is also a famous tourist location, attracting over 1 million tourists per year. One of the most prominent canals in the world, the Panama Canal is an engineering marvel. It has contributed notably to international trade and business for more than a century.
Approximately 10 percent of Panama’s GDP comes from the Panama Canal. With almost 20 percent of the budget coming from it, it is also a major source of income for the government. Tolls paid by ships passing through the canal produce revenue for the canal. The tolls are calculated according to the size and kind of ship, as well as the distance travelled. The Panama Canal is mainly reliant on freshwater, and a prolonged drought could lower its capacity dramatically. A severe drought in 2023 led the canal authorities to reduce the number of ships traversing the canal every day. The Panama Canal Authority (ACP) has reduced the maximum number of daily transits from 36 to 31 as of 1st November 2023, while keeping the maximum draft for vessels utilizing the neo-Panamax locks at 44 feet, down from 50 feet last year, to conserve water.
Panama Trade and Trade Agreements:
The Colon Free Trade Zone is known as Panama’s duty-free heaven and is the world’s second largest free trade zone. The Colon Free Zone (CFZ) became operational in June 1948 in a 35-hectare separated area close to Downtown Colon. It is strategically located near the Atlantic admission to the Panama Canal, only 90 kilometres from Panama City. Its advantageous location has helped it become the world’s second largest free zone, after Hong Kong. Colon Free Zone imports primarily chemicals and medicines, textiles, electrical and mechanical equipment, footwear, and headgear. China, Singapore, US, Taiwan, and Mexico have been the primary importers of these goods. The market in Latin America receives these re-exported goods.
Panama’s exports are dominated by the ores slag and ash sector (77 percent of total exports). Panama exports recorded will total US$3.625 billion (FOB) in 2022. In terms of Importation, Panama imports from the world recorded US$15.23 billion (CIF) in 2022, with the exception of the Colon Free Zone, the Panama Pacific Special Economic Area, Free Zones, Warehouses, and Oil Free Zones. The infographic shows Panama’s exportation and importation data for 5 years.
The Colon Free Zone recorded USD 18.640 billion in trade transactions in 2021. Reexports made up USD 9.603 billion, while imports recorded USD 9.037 billion. Colombia and Costa Rica were the primary destinations of re-exports. China, the United States of America, and Singapore were the main importers.
Panama signed nearly 15 trade agreements that are in force, as well as two free trade agreements with Israel and Colombia and one preferential trade agreement with Trinidad and Tobago, which is not yet in force. The trade finance is not widely available to enterprises in Panama. Their ability to finance imports and exports may be hampered as a result. Non-tariff trade obstacles exist in certain markets for businesses operating in Panama. Technical rules, sanitary and phytosanitary precautions, and customs processes are a few examples of these obstacles. Businesses in Panama may find it challenging and expensive to export their products and services to various markets.
The government is attempting to lower trade barriers such as tariffs and non-tariff barriers, facilitate easier access to trade financing, and lower the cost of transportation. To create a workforce that is skilled, the government is also spending money on training and education. The Panamanian market has certain advantages despite these obstacles. The nation boasts an open economy, a well-developed infrastructure, and a strategic location. Also, Panama can seek more bilateral trade agreements.
Panama Investments Climate:
Panama has a diverse investment climate, and an economy grew at one of the fastest rates in the Western Hemisphere during the past ten years. Panama has signed 21 bilateral investment protection agreements with: Argentina, Canada, Chile, Cuba, the Czech Republic, the Dominican Republic, Finland, France, Germany, Italy, Mexico, the Netherlands, Qatar, Spain, Sweden, Switzerland, South Korea, Ukraine, the United States, the United Kingdom, and Uruguay. Panama Also signed two bilateral investment treaties that have still not entered into force, one with Belgium and Luxembourg, and another with the United Arab Emirates.
The Panama Tax Authority announced in a press release on October 27, 2023, that the Financial Action Task Force (FATF) took the decision to take Panama free from the Anti-Money Laundering (AML) gray list. As stated in the release, the decision was taken in appreciation of Panama’s initiatives to stop the funding of terrorism and money laundering. In June 2019, the Financial Action Task Force (FATF) placed Panama on its “gray list” of countries, partly because of the fifteen unmet FATF compliance requirements.
Conclusion on Panama economy:
Recently, Panama exited financial crime watchdog FATF’s gray list, which will help Panama grow its economy. Investments experienced delays and even cancellations as a result of investors’ reluctance to commit to large-scale projects in Panama. Also, due to the gray listing, investors who desire transparency and anti-money laundering standards compliance found Panama to be less appealing as a financial hub. Accessing international capital markets was restricted for Panamanian institutions, which made it more difficult for them to raise capital in order to grow. But, after removing Panama from the gray list, Panama’s economy will rise on a boom in the coming future.
The door to bilateral trade and investment agreements is open now. The removal of the gray listing is expected to lower transaction costs for Panamanian exporters, increasing the competitiveness of their goods on global markets also, and can entice new trading partners to interact with the nation, which might result in a diversification of export destinations. In terms of importation, Importers may profit if trade flows are facilitated, delays are decreased, and customs procedures are simplified by the removal of the gray listing. Importers and consumers could benefit from a more efficient supply chain as a result of the general improvement in Panama’s trading environment.
Overall, the country’s export and import operations are anticipated to benefit from Panama’s removal from the FATF’s gray list. Trade and economic growth in Panama are anticipated to be stimulated by the expanded trade facilitation, decreased transaction costs, and improved reputation.
The author is an Advisor of ASIA – Latin American and Caribbean countries and is also the Director of international trade and foreign investment at Grupo 108.
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