World economies
PANAMA has a fully dollarised free-market economy, based mainly on the service industry and heavily weighted towards banking, commerce and tourism. The well-developed service sector accounts for nearly 80 per cent of its gross domestic product (GDP).
Being an extremely open economy, it is highly susceptible to external factors. Fluctuations such as a decreased demand for exports to the US or a smaller flow of capital into Panamanian banks could have huge implications for the nation’s economy.
However, like any developing nation, Panama continues to face a myriad of economic challenges. It is plagued by high poverty and inequality of income distribution and ranked the second worst in Central America.
According to a survey, some 36.8pc of the population were living in poverty, defined as an income of less than $100 a month, and 16.6pc were living in extreme poverty in 2003.
There had been a slight improvement with poverty falling to 32.7pc and extreme poverty to 14.4pc in 2008. However, it made significant progress in reducing poverty from 26.2pc to 18.7pc and extreme poverty from 14.5pc to 10.2pc between 2008 and 2014.
Despite the gains on poverty reduction, sharp regional disparities remain. Poverty prevails in rural areas. While in urban areas extreme poverty is below 4pc, in rural areas it is about 27pc.
According to the IMF, poverty still affects 22pc of the population — with 10pc of the population hit by extreme poverty — and inequalities are among the highest in Latin America.
So, Panama, which has tremendous need for sustained growth, continues to struggle with the need to strike a balance between investing in more and better improvements besides maintaining good fiscal management and eliminating corruption from the projects it undertakes.
The country has had the highest growth in Latin American economies over the past two decades which caused a significant increase in its per-capita income. Exceptionally strong growth contributed to an improvement in social-economic conditions.
The country resisted the international financial crisis well. Though the country is experiencing slowdown in economic activity since 2013, it has also put an end to the government’s tendency to overspend on large infrastructure projects that had been overheating the economy. Since then, the country has experienced solid growth pushed by domestic demand.
GDP grew by over 10pc in 2007, 2008 and 2009. Despite the global financial crisis, it expanded by 7.7pc in 2010.
Growth rates bounced back to over 11pc in 2011 and 2012. Since 2013, however, Panama’s GDP has been growing at a slower rate with annual growth averaging 7.2pc between 2001 and 2013, more than double the regional average.
Panama is well positioned to continue making progress towards the twin goals, ending extreme poverty and boosting shared prosperity, supported by growth prospects and the government’s renewed attention towards structural reforms, particularly related to infrastructure, education and skills, and the effectiveness of public institutions.