Prior to the COVID-19 crisis, Panama sustained high but declining growth rates, driven mainly by construction and public investment, and translating into a growing middle class and lower poverty rates. The middle class expanded from 50.8 percent of the population in 2015 to 56.9 percent in 2019. However, rural poverty remained six times higher than in urban areas. The COVID-19 crisis led to a two-digit contraction in GDP in 2020 and a 2.7 percentage-points increase in the poverty rate, despite strong poverty-mitigation efforts.
Economic activity started to recover by the end of 2020, and the country needs to ensure that the pandemic stays at bay to allow lagging sectors, such as tourism, to fully recover. Moreover, excess stock of buildings, higher household indebtedness, and reduced fiscal space require a rethink of the growth model.
The pandemic amplified existing challenges. Panama’s fiscal deficit (5.5 percent of GDP in 2021 vs. 2.9 in 2019) and debt levels (63.7 percent of GDP in 2021 vs. 46.3 in 2019) are much higher than before the pandemic. As a dollarized economy, the country needs to promote fiscal consolidation to reduce interest payments, reduce public debt, and comply with the deficit target of 4 percent of GDP for 2022, set by the Fiscal and Social Responsibility Law (FSRL). The main fiscal risk is the deficit in the pension system, which requires larger transfers from the Treasury every year. Tax revenues are lower than peers. The country’s weaknesses in Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) are deterrents to Foreign Direct Investment (FDI) and to leveraging Panama as a regional business and financial hub.
The spread of COVID-19 infections slowed in 2021, with 73 percent of population at least partially vaccinated. The Omicron variant triggered a new spike, but the number of new cases was down by 85 percent by mid-February compared to end-January.
Panama’s GDP has rebounded from the COVID-19 crisis with 2021 growth at 15.3 percent, driven by copper mining from Panama Cobre, construction, manufacturing, and commerce. The mining sector accounts for 7.1 percent of GDP in 2021, up from 3.8 percent in 2020. Poverty is estimated to have decreased from 14.8 percent in 2020 to 12.3 percent in 2021.
Panama’s fiscal position improved in 2021, but the deficit and debt levels are still high. The fiscal deficit declined from 10 percent of GDP in 2020 to 5.5 percent, below the 7-percent limit set by the FSRL. The debt-to-GDP ratio declined from 68.5 in 2020 to 63.7, while debt risk indicators improved. Deficit reduction was achieved due to higher revenue growth (16.9 percent), moderation on current expenditures (5.6 percent growth), and containment on capital expenditures (17.7 percent contraction). However, revenues and expenditures are still not back at the pre-crisis level. In 2021, revenues reached 18.2 percent of GDP (18.5 percent in 2019) and expenditures were at 23.7 percent of GDP (21.3 percent in 2019), due to increases in subsidies, transfers, and interest payments.
GDP is expected to grow strongly again in 2022 on the back of the growth carry-over from 2021 (9.4 percent), continued expansion of the mining sector, and the late recovery in tourism and air transportation. In the medium term, GDP will converge to its potential growth rate of around 5 percent. Although Panama Solidario, the emergency social assistance program, has played a critical role in mitigating the adverse effects of COVID-19, the more limited efficacy of the program in rural areas calls for further protection to prevent poverty and inequality from increasing further.
Fiscal results will continue to improve, but compliance with the FSRL deficit limits will become harder, despite new revenues of $375 million yearly from mining royalties, hinging on a rollback of COVID-19 expenditures, efficiency gains from tax administration, expenditure discipline, and a solution to the pension system debt.
Last Updated: Apr 07, 2022