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Overview

Prior to the COVID-19 pandemic, Panama was growing at four times the regional average, propelling it to high-income status. From 2014 to 2019, Panama’s GDP grew at an average rate of 4.6 percent, while the LAC region grew at an average of 0.8 percent. Services have been the primary driver of growth, contributing to almost two-thirds of Panama’s increase in GDP.

The transport, communications and financial services sectors have played a particularly notable role in growth and industry represents the second most important driver.

Growth was also fueled by construction throughout the 2014-2019 period and by mining more recently (in the wake of the world’s largest new copper mine – Panama Cobre - opening in 2019).

Construction, however, was slowing before the pandemic due to the conclusion of mega projects and an oversupply of residential and commercial buildings. On the demand side, growth has been balanced, with consumption as a primary driver, but with important contributions from investment and net exports, particularly in 2018-2019.

The COVID-19 pandemic pushed Panama back to middle-income status. Panama has been the most affected country by the COVID-19 pandemic in Central America, however with more than 80 percent of the population having received at least one vaccine dose, the pandemic is receding.

Panama’s GDP declined by 17.9 percent in 2020, as construction halted from March to September 2020, and Panamanian airports were closed from March to mid-October 2020. Unemployment reached 18.5 percent in 2020 and the poverty headcount increased to 14.8 percent in 2020, up from 12.1 percent in 2019 (at US$6.85/ day Purchasing Power Parity - PPP). Estimates suggest that poverty could have reached 18.8 percent without Panamá Solidario.

Economic activity rebounded in 2021, bringing the country back to high-income status, but the social impacts of the COVID-19 crisis are still present. GDP grew by 15.3 percent in 2021, boosted by higher copper production (61 percent increase), increased movement at the Canal (11 percent increase in cargo volume) and in the number of airport passengers (102 percent increase), as well by consumption and public investment.

Labor markets have shown signs of recovery in 2021; however, informality and self-employment are still high. In addition, the occupation level was still 8 percent below pre-pandemic levels, and the unemployment rate reached 11.1 percent (relative to 7 percent in 2019).

The COVID-19 crisis induced a deflation in 2020, but the rebound from the crisis and shocks have reversed this trend in 2021 and 2022. The COVID-19 crisis kept average inflation at zero percent at the end of 2020.

As oil and other commodity prices rebounded, inflation (12-month average) reached 3.2 percent in July 2022, led by transport (12.5 percent, weight in the CPI basket: 16.8 percent) and food (2.8 percent, weight: 22.4 percent), but is slowing because of subsidies and tax cuts for fuel and foods that were implemented in July, which will cost up to US$300 million. Panama’s dollarization has helped keep inflation lower than in regional peers, as expectations are well-anchored.

Government deficit and debt continue to decline after the shock caused by COVID-19. Public expenditures increased from 21.8 percent of GDP in 2019 to 28.7 percent of GDP in 2020 as the Government of Panama responded to the COVID-19 crisis by increasing health expenditures and energy subsidies, and by creating a new transfer program (Panamá Solidario) to alleviate the poverty impacts of the crisis.

Fiscal results continue to improve in 2022 with revenues posting growth of 7.8 percent in the first half of 2022 and current expenditures growing by a moderate 2.3 percent. Public investments declined slightly (-2.9 percent).

GDP growth is expected to stabilize at around 5 percent in the medium term, led by private consumption and investment, while public consumption and investment should moderate in the medium term in a fiscal consolidation environment. Forecast for 2022 is 6.2 percent.

Inflation will be higher in 2022 and in 2023 due to higher food and transport prices, but inflation will converge to 2 percent in the medium term.

Poverty is estimated to decrease to 13 percent in 2022 (US$6.85 a day 2017 PPP) from 14.1 percent in 2020, approaching its pre-pandemic level of 12.1 percent, due to the mitigation effects of the Nuevo Programa Panama Solidario and the continued recovery of the labor market.  

Fiscal consolidation is expected to continue with the government abiding by the deficit targets set by the Fiscal and Social Responsibility Law, which would stabilize the debt-to-GDP ratio at 64 percent.

Additionally, the debt has low cost (3.95 percent), with more than 80 percent of the debt with fixed interest rates and an average maturity of 16 years. Continued social unrest, climate change, and natural disasters can trigger new expenditures.

Looking ahead, Panama will need to deepen its focus on institutional reforms to transition out of the crisis and build back better by: (i) reducing long-term inequities in human capital and closing gender gaps; (ii) addressing institutional weaknesses for building a more transparent and fiscally sustainable economy and (iii) supporting a more inclusive and environmentally sustainable economic recovery while also promoting adaptation and mitigation to climate change.

Last Updated: Oct 04, 2022

LENDING

Panama: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments
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PANAMA +507 831-2000
Avenida Aquilino De La Guardia y calle 47 Marbella, Edificio Ocean Business Plaza, Piso 21, Oficina 2111. Panama City
USA +1 202 473-1000
1818 H Street NW, Washington, DC 20433