Economy

Overview

Panama once had an agricultural-based economy, where people communally owned and farmed land in villages. The nation’s geographic location makes it an important site for trade and transit, a position that assumed worldwide significance in the 20th century with the completion of the Panama Canal. The passageway is primarily based on a well-developed services sector that accounts for 72 percent of GDP. Services include the Panama Canal transit, banking, insurance, government and the Zona Libre de Col?, or Colon Free Zone, the world’s second-largest free-trade area after Hong Kong. Mining, tourism and maritime services are projected sources of future growth.

The United States transferred full control of the waterway to Panama on Dec. 31, 1999, in accordance with two treaties signed in 1977 under U.S. President Jimmy Carter. The canal itself had brought the United States enormous economic benefits. Each year, 40 percent of U.S. exports and imports were shipped via the canal, and U.S. cargo passing through it comprised about one-third of its total freight volume. From 1981 to 1990, the canal generated a total income of $3.18 billion for the United States, which maintained a substantial military presence in the Canal Zone for conducting military interventions in Latin America, including the 1989 invasion of Panama and the arrest of then-President Manuel Antonio Noriega. Hutchison Whampoa, a Hong Kong-based company with ties to Beijing, now has lease arrangements to operate the canal’s ports.

There were concerns Panama would have to replace jobs and income derived from closing U.S. bases, considering estimates of $US170 million to $350 million annually from the U.S. Defense Department’s contribution to the economy through employment of Panamanians, local procurement and expenditures by personnel. With a population of 2.9 million, according to 2000 estimates, Panama had a growth rate of 2.3 percent for the year, compared to three percent in 1999. Unemployment rates tended to rise from 11.8 percent in 1999 to 13.3 percent in August 2000. However, the economy was not affected to a great extent by the changes. Earlier in 2000, the Panamanian foreign minister said he expected growth in the already good economic relations with the United States, signaling Panama did want an American presence in the form of investors who could contribute to its development.

Although the economic recovery of the early 1990s returned the economy to 1987, pre-crisis levels, sustained growth depends on Panama’s ability to resolve long-standing problems of inequitable distribution of wealth, external debt and dependence on U.S. government and canal revenues. Unemployment and under-employment continue to weigh down the national economy.

Panama acceded to the World Trade Organization, or WTO, in October 1996. During the country’s Perez Balladares administration, Panama reduced tariffs over a broad range of products and eliminated non-tariff barriers to bring its regime into compliance with the WTO. However, the Moscoso administration has moved to raise many tariffs back to WTO maximums. In 1998, U.S. merchandise exports to Panama were $US1.3 billion; U.S. imports from Panama were $US280 million ﷓ for an overall U.S. trade surplus of a little more than $US1 billion. Trade with the United States comprises about 40 percent of Panama’s total merchandise trade. Under the Perez Balladares administration, the water and electricity companies were slated for privatization in 1998, but those plans were dropped in the face of public protests. Panama privatized the ports of Cristobal and Balvoa, cement and telecom companies and casinos. The Moscoso government has indicated it does not favor further privatizations, which tend to perpetuate unemployment. While there have been talks of Panama entering the free-trade agreement of the Americas in 2005, the government had increased tariffs on basic services and public transportation by April 2001.

Written by CountryWatch.com. Sources: www.cnn.com, Banco Nacional de Panama, Economic Commission for Latin America and the Caribbean, International Monetary Fund. For additional sources, please see Appendix B of this review.

Economic Performance:

The economic performance of Panama for the year 2000 was slow for the third consecutive year. Estimates are that the real GDP grew by 2.3 percent compared to 3 percent growth in 1999. Domestic demand reduced because of a contraction in the capital formation that followed the completion of large-scale infrastructure works, slackening consumption reduced domestic demand. The decrease in the growth rates led to an increase in the unemployment rate from 11.8 percent in August 1999 to 13.3 percent in August 2000. Large declines in construction, farming and fishing and related food-processing industries account for most of the shortfall. The service sector, which accounts for about 80 percent of GDP, is estimated to have grown by 4.7 percent in real terms in 2000.

The macroeconomic policy was focused on strengthening the financial position of the public sector, reducing the foreign debt and reining in the country’s large deficit on the balance-of-payments current account. In support of the government program, a precautionary Special Drawing Rights arrangement was signed midway through the year with the IMF.

Panama’s economy has been doing well with a stable financial environment and consistently low inflation rate. However, while substantial progress has been made with the financial sector reforms, progress in other areas of structural reform was slower than expected, which could reverse the progress. According to Panama’s Ministry of economy and Finance, the country’s economy grew by three percent during the first four months of 2001 compared to the same period last year. The government’s Monthly Economic Activity Index fell 0.1 percent in April compared to the same month in 2000. Shrimp production showed a recovery after an outbreak of the white-stain virus, and there are better expectations in the banana industry for the rest of 2001.

Written by CountryWatch.com. Sources: Banco Nacional de Panama, Economic Commission for Latin America and the Caribbean, International Monetary Fund ( www.imf.org), CountryWire. For additional sources, please see Appendix B of this review.

Balance of Payments:

In 2000, the deficit on the external current account is estimated to have declined from $US1.4 billion, or 14.4 percent of GDP, in 1999 to $US1 billion, or 10.4 percent of GDP, in 2000. Most of the current account deficit was financed by foreign direct investment. The exports of goods, which grew by 6.7 percent, was led by the recovery of re-exports within the Colon Free Zone. Exports of domestically produced goods, which represent 13 percent of the total, climbed by 6 percent, attributed to the higher sales of products such as flour, fish oil, shrimp larvae, coffee and sugar. On the other hand, sales of bananas, shrimp, cattle and petroleum products fell. Imports of goods were up by 6.3 percent, particularly because of the 11.3 percent increase in purchases by the Colon Free Zone. Oil imports increased by 53 percent. The real effective exchange rate appreciated by 1.6 percent in the first nine months of 2000 and has risen by 3.3 percent since December 1998. The international reserves of Panama have increased from $US964.423 million to $US1255.42 million in the first quarter of 2000 to the same quarter in 2001. The exports for the first quarter of 2001 were at 223.14 million balboas, an increase of 24.59 percent from the same quarter last year. The imports declined by 16.202 percent from the same quarter last year to reach 743.375 million balboas.

Written by CountryWatch.com. Sources: Banco Nacional de Panama, Economic Commission for Latin America and the Caribbean, International Monetary Fund ( www.imf.org), CountryWire. For additional sources, please see Appendix B of this review.

Regional Situation

:

With respect to regional economic developments, Panama would be affected by the slowing down of the global economies, which could affect its economic performance adversely. However, Panama has been trying to develop good trade relations with other Central American countries, which could help the country in the long term.

Panama
Macroeconomic Activity
Real GDP Per Capita

1996

1997

1998

1999

2000

Real GDP
(Millions of 1995$US)

17,342

18,108

18,909

19,663

20,548

Total Population
(Millions-Mid Year Average)

2.650

2.691

2.731

2.770

2.808

Real GDP Per Capita
(1995$US Per Capita)

6,543

6,729

6,924

7,098

7,317

Sources:

US CIA World Factbook, IMF World Outlook,
US Census Bureau International Data Base,
UN Statistical Yearbook, CountryWatch.com Calculations

Global Ranking

Gross Domestic Product
(Millions of 1995$)

Population
(Millions)

GDP Per Capita
(1995$)

Country

Rank

2000
GDP

Rank

2000
Population

Rank

2000 GDP
Per Capita

Panama

88

20,548

131

2.808

59

7,317