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Quick Facts
- Population:
- GDP (PPP):
- $92.9 billion
- 5.8% growth
- 6.5% 5-year compound annual growth
- $23,024 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
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Panama’s economic freedom score is 67.0, making its economy the 54th freest in the 2018 Index. Its overall score has increased by 0.7 point, with significant improvements in judicial effectiveness and fiscal health offsetting declines in government integrity and property rights. Panama is ranked 10th among 32 countries in the Americas region, and its overall score is above the regional and world averages.
Panama’s economy has depended on transportation and logistics services, along with debt-financed public works infrastructure projects, to boost economic growth. Because public debt surpassed $37 billion in 2016, the government will have to rely on Panama Canal expansion and new investment to stimulate future growth. International pressure over governance of Panama’s offshore banking sector should lead to reforms, and the government has reaffirmed its commitment to implementing anti–money laundering reforms, but persistent corruption continues to undermine the rule of law.
Background
Panama’s isthmian canal connecting the Caribbean Sea and Pacific Ocean has been a vital conduit for global commerce ever since it opened in 1914. An ambitious expansion project was completed in 2016. President Juan Carlos Varela’s single five-year term ends in 2019. His predecessor, Ricardo Martinelli, was arrested in Miami in June 2017 and held in a Florida jail pending extradition to face corruption charges in Panama. Panama’s U.S. dollar–based economy has been among the fastest growing in the region, encouraged by the canal’s expansion and other public infrastructure-improvement projects. It is based primarily on a well-developed services sector that accounts for more than three-quarters of GDP. About one-fourth of the population, however, still lives in poverty.
Panama has an adequate legal framework to protect property rights, but enforcement is weak. Most land is not titled. The independent judicial system is inefficient and susceptible to outside influence. Corruption is widespread. Public concerns about government transparency and graft were reinforced by the 2017 arrest in the U.S. of former President Martinelli on charges related to the Odebrecht scandal and other malfeasance.
The top personal income and corporate tax rates are 25 percent. Other taxes include value-added and capital gains taxes. The overall tax burden equals 15.8 percent of total domestic income. Over the past three years, government spending has amounted to 23.1 percent of total output (GDP), and budget deficits have averaged 2.6 percent of GDP. Public debt is equivalent to 39.2 percent of GDP.
The freedom to form and operate a business is relatively well protected within an efficient regulatory system. Panama’s labor code remains highly restrictive, and the nonsalary cost of hiring a worker is relatively high. The government has extended price controls on 22 basic foodstuffs through the end of 2017, and higher oil prices have raised the cost of electricity subsidies.
Trade is significant for Panama’s economy; the combined value of exports and imports equals 94 percent of GDP. The average applied tariff rate is 6.1 percent. Nontariff barriers impede some trade. In general, government policies do not significantly interfere with foreign investment. The financial sector, vibrant and generally well regulated, provides a wide range of services. Banking continues to expand, albeit slowly.