Panama is a small country of some 4.4 million people. It has benefitted from steady economic growth, but poverty and income inequality has been stubborn, disproportionately affecting rural indigenous territories and Afro-Panamanian populations. Notably, and increase from 33% to 54% of land protected, and strong ocean conservations efforts have resulted in Panama being one of only three carbon negative countries in the world.
Prior to the COVID-19 pandemic, Panama’s economy grew four times the Latin American and the Caribbean (LAC) regional average. From 2014 to 2019, Panama's Gross Domestic Product (DGP) grew at an average rate of 4.7 percent, well above the 1.1 percent in LAC [1]. In 2020, GDP contracted by 17.7 percent, the most significant in the region due to the service-oriented structure of its economy, but the economic rebound was strong at 15.8 and 10.8 percent, respectively, in 2021 and 2022.
Panama’s economy is an important transport and logistical hub and a trade and financial center. However, after a large copper mine came on stream in 2019, mineral exports are also playing a key role. Growth is expected to be around 6.3 and 6.5 percent over the next two years, supported by construction, transport and logistics, tourism, and mining. The current account deficit is expected to narrow to 3.4 percent of GDP in 2023 on the back of higher services exports and copper prices and lower fuel prices before reaching 3 percent in the medium term. Fiscal policy is expected to adhere to Panama’s Social and Fiscal Responsibility law, although the incoming authorities will need to enact measures to address fiscal risks arising from Canal and mining revenues and pension imbalances, in addition to potential climate change shocks. The public debt and fiscal deficit are projected to decrease to 55.3 and 1.5 percent of GDP by 2025, respectively.
Poverty is expected to continue decreasing over time and approach pre-pandemic levels by 2025. Over the past thirty years, the country excelled in job creation, leading to an outstanding decrease in poverty (from 48.2 percent in 1991 to 12.1 percent in 2019 at $6.85 a day, in 2017 PPP prices). However, unemployment and informality increased between 2017 and 2019 as the pace of growth slowed down and further worsened during Covid-19. It is estimated that poverty in 2023 decreased by 0.3 percentage points, reaching 13.4 percent. Government’s transfers (e.g., Nuevo Panama Solidario program) and subsidies have partially mitigated the impact of external shocks (COVID-19, fuel, and food prices) on poverty.
With a stable macroeconomic environment, Panama will likely require additional fiscal reforms in the middle term. The country will likely require fiscal reforms to comfortably meet the Social and Fiscal Responsibility Law (SFRL) targets, including pension, expenditure, and tax reforms. Some economic risks could arise from the design of pension reforms needed to curb the Defined Benefit Subsystem's actuarial deficit, tax administration inefficiencies, and climate shocks, including increased frequency and intensity of El Niño.
[1] Growth rates are computed using GDP PPP (constant 2017 international $) from World Development Indicators, World Bank.
Last Updated: Oct 04, 2023
