Panama is a small country of some 4.4 million people located on the isthmus between the Caribbean Sea and the Pacific Ocean, with Costa Rica to the west and Colombia to its east. The country is famously known for the Canal that connects the Atlantic and Pacific oceans and is one of the man-made wonders of the world. Despite benefitting from many years of steady economic growth, the country has a relatively stubborn poverty rate which disproportionately affects rural indigenous territories. Panama is one of only three carbon negative countries in the world, with more than 33% of land protected and efforts underway to reforest more areas.
Prior to the COVID-19 pandemic, Panama’s economy grew four times the regional average, propelling it to high-income status. From 2014 to 2019, Panama's GDP grew at an average rate of 4.7 percent, while the LAC region grew at an average of 1.1 percent[1]. In 2020, GDP contracted by 18 percent, the most significant in the region due to the pandemic.
Panama's economy recovered quickly in 2021, growing 15.3 percent due to high vaccination rates, substantial investments, and increased exports from a new copper mine. The economy is projected to grow at 5.7 percent in 2023 and 5.8 percent in 2024. The fiscal deficit is projected at 3.0 and 2.0 percent of GDP in 2023 and 2024, respectively. Growth is driven by the services sector, led by wholesale and retail trade, transportation, storage, and communications. However, construction, manufacturing, and mining have also played an important role in Panama's economic growth. Between 2011-2017 construction of mega projects led the growth (e.g., the expansion of Panama Canal, Tocumen International Airport, Metro of Panama, and the real estate boom of Panama City). The increase peaked at 11.3 percent in 2011 before slowing gradually to 4.6 percent during 2015 and 2019 with the conclusion of most projects.
Poverty also increased during the Pandemic crisis despite government efforts to mitigate this impact. In 2020, poverty increased to 14.1 percent, 2 percentage points higher than the 2019 poverty levels of12.1 percent (at US$6.85/day purchasing power parity). It is estimated, however, that the poverty rate would have been 3.6 percentage points higher in 2020 without Panamá Solidario, given the important impacts of the pandemic on the Panamanian labor market resulting in an unemployment rate of 18.5 percent.
Poverty rates fell between 2008 and 2019, however they continue to be higher in Indigenous territories than in the rest of the population, widening inequality. While extreme poverty ($3.65 2017 PPP) for non-Indigenous Peoples and non-Afro-descendants was 1.3 percent in 2019, it was 18 percent amongst Indigenous Peoples. Similarly, the poverty ($6.85 2017 PPP) rate for Indigenous Peoples in 2019 was 6.8 times that of non-Indigenous Peoples.
Poverty is expected to continue decreasing over time and reach pre pandemic levels by 2025 as labor markets continue to recover. In 2022, the employment rate reached 62.3 percent, and the unemployment rate decreased to 9.9 percent, but they are still lagging in 2019 levels. Thus, poverty rates for those living on less than $6.85 a day stood at 13.3 percent in 2022. Carefully targeting Panamá Solidario remains critical for poverty reduction and spending efficiency. Inflation, which can affect vulnerable households the most, is projected to increase in 2023 (3.3 percent) as fuel and food subsidies expire before converging to 2 percent by 2025.
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 59 percent. Panama has a track record of fiscal discipline. Therefore, it is expected to adhere to the gradual achievement of a 1.5 percent of GDP deficit in 2025, as called for by the Social and Fiscal Responsibility Law, through a combination of measures to increase tax revenues and reduce expenditures.
Panama has one of the highest percentages of forest cover in the world, covering 68 percent of the country’s total area. Approximately two-thirds of the country’s forested area overlaps with Indigenous territories. In Panama, protected areas and claimed Indigenous territories are the most effective tenure regimes for avoiding deforestation and the country is increasingly recognizing their role in forest conservation and climate change.
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.
[1] Growth rates are computed using GDP PPP (constant 2017 international $) from World Development Indicators, World Bank.
Last Updated: Apr 04, 2023
