Panama mobilised sizeable fiscal resources to respond to the COVID-19 pandemic, making the most of its access to international capital markets. This allowed the country to maintain its historically high investment rate, which sustains its economic dynamism. However, the sharp increase in debt ratios and in fiscal deficits has significantly narrowed fiscal space going forward. The country will need a comprehensive fiscal agenda based on broad consensus to rebuild fiscal buffers while providing support to the economy. Panama’s favourable environmental record offers potential for further developing sustainable finance instruments to fund key development objectives. This chapter examines the lessons from the pandemic and recovery periods that can assist Panama in mobilising public and private resources towards a green and sustainable development path.
A Multi‑dimensional Approach to the Post-COVID‑19 World for Panama
Abstract
Benchmark data
Panama reached a high COVID-19 vaccination rate with 73% of its population fully vaccinated, on a par with the OECD average (74%). Nonetheless, it remains below the rate (90%) achieved in Chile.
Panama maintained high levels of investment with gross fixed capital formation of 27.4% in 2021 and 32.3% in 2023, well above the OECD (22.4%) and LAC (19.9%) averages.
Panama’s general government debt to GDP ratio was 55.6% in 2021, declined to 52.4% in 2023, and slightly increased to 54.6% in 2024. Remaining below the OECD average of 106% in 2021Q4 and below the LAC average (69.3%) but higher than countries such as Chile (41.0%) or Paraguay (41.9%). The ratio increased in 2020 during the pandemic but reduced subsequently.
Panama has low greenhouse gas (GHG) emissions, of 4.4 kg CO2eq per capita without accounting for land use, land use change and forestry. It is carbon neutral in net terms.
Exposure to particulate matter air pollution (PM2.5) is lower in Panama (13 µg/m3) than in the average OECD (13.9) or LAC country (18.6).
The Panamanian economy is much less material intensive than the LAC or OECD averages. It uses 7.2 tonnes of material per capita compared to the OECD average of 17.5 and the LAC average of 15.7 and substantially below high material consumption countries such as Chile (53.0)
Findings on the impact of COVID-19
The strong fall in revenues due to the halt in economic activities resulted in a sharp increase in the overall non-financial public sector (NFPS) fiscal deficit of Panama – from 2.86% of GDP in 2019 to 10.23% in 2020, then receding to 6.45% in 2021. In line with the revised fiscal rule, fiscal consolidation achieved a 3.98% deficit in 2022 and 3.93% in 2023. However, in 2024, the deficit increased to 7.35%, reflecting renewed fiscal pressures and economic challenges The fiscal consolidation law was amended new limits for the fiscal deficit, aiming for 4% in 2025, with a gradual reduction to 1.5% by 2030.
The “scissor” effect of the crisis – with a simultaneous fall in revenues and increase in borrowing and spending – has further deteriorated Panama’s already high debt-to-tax ratio to 410% in 2022, although the country’s debt to GDP level in 2023 (52.4%) remained below the LAC average (73.9%).
At 13.1% in 2022, tax revenues as a share of GDP were among the lowest in the region – the LAC average is 21.5% – and far lower than the OECD average of 34.0% (OECD data refers to 2019) (OECD et al., 2024[1]).
Non-tax revenues derived from the Panama Canal have traditionally compensated for the country’s low tax efforts. During the COVID-19 crisis, they increased further as a share of total revenues (from 21% in 2019 to 27.6% in 2020) despite being adversely affected in the second quarter of 2020 (MEF, 2021[2]).
Despite a moratorium on servicing bank loans, the quality of Panama’s loan portfolio slightly decreased, indicating the need for prudential management. The share of non-performing loans (NPLs) increased only slightly from 2% in 2019Q4 to 2.7% in 2022Q2.
Policy responses
Panama implemented a number of measures to redirect resources to tackle the COVID-19 crisis, including a suspending the limits of and amending the Social and Fiscal Responsibility Law (SFRL). The government also reassigned the resources of the General State Budget, with restructurings of around USD 2 billion in 2020 and USD 825 million in 2021 destined to COVID‑19 spending. Finally, Panama made use of the resources of its sovereign wealth fund (Fondo de Ahorro Panamá).
The government additionally sought domestic and external financing to finance the response.
To safeguard financial stability, a Fund for Economic Stimulus (USD 1 billion) was created to provide timely liquidity to banks in financial distress and act as a second-floor bank to encourage provision of credit to the productive sector.
To support liquidity of firms and individuals, the government adopted several measures, including extending the term for payment of national taxes, rates and special contributions; offering a discount for prompt payment of taxes and a series of tax amnesties; and placing a moratorium on servicing bank loans.
Strategies for the recovery
Panama should leverage the crisis to strengthen the inclusiveness, resilience and sustainability of its financing for development model, taking into account both at the impact of the crisis and pre-existing structural challenges. A comprehensive and holistic approach could include:
Stronger fight against tax evasion and avoidance. In the short term, fighting tax evasion can be a first effective step to strengthen public finances in Panama without increasing the tax pressure on households and firms.
Broader tax base and reduction of tax exemptions. In the medium term, assessing tax exemptions and gradually shifting the composition of tax revenues towards greater value-added tax (VAT) and personal income tax could help free up additional fiscal space for financing a sustainable and resilient recovery.
More effective and efficient public spending. Effectiveness and efficiency of public spending can help raise the well-being of Panamanian citizens.
Continuous improvement of financial transparency. Panama should continue to improve its financial transparency initiatives, in part to avoid potential negative effects on the profitability of banks as a consequence of international financial institutions (IFIs) curtailing their interactions with Panamanian banks.
Public debt management. Panama’s public debt does not pose major risks in the short to medium term. Continuing to prioritise sustainable debt management can help achieve long-term socioeconomic progress while also investing in infrastructure and housing, smoothing consumption or coping with climate and health emergencies.
Sustained banking sector resilience. Continued supervision of the financial system is important to stave off emerging risks. As the moratorium on servicing bank loans de facto ended in December 2021, Panama should closely follow the share of NPLs in order to further assess the credit exposure of banks and adjust capital buffers.
Ongoing exploration of new sustainable debt instruments. To mobilise additional resources for a green and sustainable recovery, Panama should further develop instruments such as green, social, sustainable, or sustainability-linked (GSSS) bonds. It can further enhance regulation and verification through a consolidated sustainable finance framework.
Source: All data for OECD countries have been extracted from the OECD COVID-19 Recovery Dashboard (OECD, 2022[3]). As for the data for Panama; Panel A comes from WHO; Panels B and E from the World Development Indicators (World Bank, 2024[4]); Panel C from the World Economic Outlook, October 2024 Database (IMF, 2024[5]); Panel D from the Ministry of Environment (Ministerio de Ambiente, 2023[6]); and Panel F from the OECD Environment Material Resources Database (OECD, 2022[7]).
In the face of the pandemic, the Panamanian authorities took prompt actions to redirect spending towards the emergency. They also amended the Social and Fiscal Responsibility Law in order to revise limits to the fiscal deficit of the non-financial public sector (NFPS) while setting a gradual fiscal consolidation path towards 2025. As Panama is a dollarised economy without a central bank, its response mainly included fiscal and credit support. In 2020, the government maintained the same level of expenditure (in nominal terms) established in the General State Budget 2020, but significantly reassigned resources in order to attend the emergency. In particular, a restructuring of around USD 2 billion was carried out to cover COVID-19 spending equivalent to around 3% of GDP, including reductions of USD 500 million in operating expenses of public institutions and adjustments of USD 1.5 billion to public investments (MEF, 2020[8]). Given the protracted impacts of the crisis, the General State Budget for 2021 included a further restructuring of USD 825 million1 destined to COVID-19 spending, mainly coming from budget restraints in other areas.
Despite containing expenditures, the strong fall in revenues due to the halt in economic activities resulted in an increase in the overall NFPS fiscal deficit from 2.86% of GDP in 2019 to 10.23% in 2020 and 6.66% in 2021. This is a significant increase in the budget, although it remained in line with the revised fiscal rule (MEF, 2021[9]). Total revenues of the NFPS decreased by 20.1% in 2020 with respect to 2019, while total expenditures increased by 7.8%, with current expenditures increasing by 8.9% and capital expenditures increasing by 1.4% (MEF, 2020[10]). Spending on health increased from 10.6% of GDP in 2019 to 11.6% of GDP in 2020.2 Concurrently, the national vaccination campaign progressed rapidly. All in all, the gradual economic recovery and reactivation of labour contracts supported by the vaccination programme resulted in a pick-up in total revenues by 17.9% in 2021 with respect to the previous year. This was strongly linked to increases in revenues from the Central Government, including from operations in the Panama Canal and from the Caja de Seguro Social. Total expenditures increased by 3.8% in 2021, with current expenditures increasing 5.2% with respect to 2020 and capital expenditures falling by 0.4%, indicating an increase in the payment of public sector salaries, a prioritisation of Panamá Solidario and a slow execution of planned physical investments (MEF, 2021[9]; MEF, 2023[11]).3
As of the end of 2022, the growth in economic activity contributed to an increase in total revenues of 13.4% (USD 1.5 billion), higher than the increase in total expenditures (USD 273 million or +1.7%), contributing to a 29.7% reduction in the NFPS deficit with respect to 2021 (MEF, 2023[11]). The revenues coming from state-owned enterprises towards the end of 2022, especially the dividends of the Panama Canal, which along with an increase in tolls, amounted to USD 2.5 billion, increased by USD 437 million compared to 2021. These were key to comply with the fiscal consolidation path, establishing a maximum NFPS deficit of 4% of GDP for 2022.
The deficit incurred has been financed through a mix of external and internal debt, with general government gross debt increasing from 40.2% of GDP in 2019 to 61.9% in 2020 (Figure 4.2, Panel B). Thanks to low global interest rates and ample international liquidity, Panama was able to tap international markets during the pandemic to finance the emergency. The government has also used resources from Panama’s sovereign wealth fund (Fondo de Ahorro Panamá).
Public debt had decreased to 52.39% of GDP by the end of 2024, but remained 12.1 percentage points higher than in 2019 (Figure 4.2, Panel B). Strengthening domestic revenue mobilisation will thus be key to reduce debt vulnerability in view of future shocks. Panama stands out for its high number of tax exemptions and low effective tax rates (OECD, 2018[12]). As a result, tax revenues as a share of GDP, at 13.1% in 2022, are among the lowest in the region – the LAC average is 21.5% – and far lower than the OECD average of 34.0% (OECD et al., 2024[13]). Non-tax revenues derived from the Panama Canal have traditionally compensated for the country’s low tax efforts. During the COVID-19 crisis, they further increased as a share of total revenues (from 21% in 2019 to 27.6% in 2020) despite also suffering a fall in the second quarter of 2020 (MEF, 2021[2]). The scissor effect of the crisis, with a simultaneous fall in revenues and increase in borrowing and spending (Figure 4.2), has further deteriorated Panama’s already high debt-to-tax ratio (Figure 4.2), leaving it in a weaker fiscal position to face future shocks. Panama's debt as a percentage of GDP declined steadily between 2019 and 2023; however, consolidated non-financial public sector debt increased to 57.3% in 2024.
Source: IMF (2024[5]), World Economic Outlook Database, October 2024.
It is therefore important for Panama to focus on improving fiscal sustainability, including a comprehensive approach towards better targeted and more efficient public spending, a stronger fight against tax evasion and avoidance, and a gradual expansion of the tax base. Improving tax revenue collection efforts will be key to strengthen Panama’s ability to service its debt while ensuring that public investment and social expenditure are not the adjustment variable of the gradual fiscal consolidation path envisaged by the government. This is especially important in view of the increasing cost of debt, following monetary tightening in the major economies.
Debt-to-tax ratio (gross public debt) in selected LAC countries
Source: Own elaboration based on OECD et al. (2024[13]), Revenue Statistics in Latin America and the Caribbean 2024. https://doi.org/10.1787/33e226ae-en.
Despite a moratorium on servicing bank loans, the quality of Panama’s loan portfolio has slightly decreased, indicating the need for further prudential management. The share of NPLs increased only slightly from 2% in 2019Q4 to 2.85% in 2023Q1 and remains below the peak of 3.8% in 2018Q3 (Figure 4.4, Panel A). This implies that the expiration of the decree for the modified repayment of bank loans in 2021 only had modest impacts on the loan portfolio quality, but prudential management may be necessary going forward. The total loan portfolio of general licence banks contracted from USD 69.7 billion in 2019 to USD 68.2 billion in 2020 (INEC, 2022[14]). Looking at the sectoral composition of the loan portfolio in 2020, official banks have a relatively higher exposure to the housing (41% of the total), personal consumption (34.1%) and agriculture (7.4%) sectors. Private banks are more exposed to loans in commerce (26.9%), the external sector (23.2%) and housing (21.6%) (Figure 4.4, Panel B).
Note: Data for Panel B are based on preliminary calculations.
Source: IMF (2024[15]), Financial Soundness Indicators, www.imf/data.org for Panel A; INEC (2024[16]), Finanzas 2024, www.inec.gob.pa/publicaciones/Default3.aspx?ID_PUBLICACION=1248&ID_CATEGORIA=4&ID_SUBCATEGORIA=28 for Panel B.
In response to the COVID-19 pandemic, Panama reassigned resources and raised funds from multiple sources to enable the necessary public spending. The main policy actions undertaken include:
Suspension of the limits and amendment of the Social and Fiscal Responsibility Law (SFRL). In March 2020, the Ministry of Finance was authorised to request a temporary suspension of the financial limits over social fiscal responsibility established by Law 34 of 2008, modified by Law 102 of 2019, before the National Assembly, if necessary. The SFRL was then amended in November 2020 with revised deficit objectives for the non-financial public sector (NFPS) between 9% and 10.5% of GDP for 2020 and a gradual fiscal consolidation path towards 2025 (see Law 185 of November 2020). In 2024, the legislation was modified again to establish a new framework for reducing the fiscal deficit between 2025 and 2030. The reform sets progressive deficit limits, starting at 4% of GDP in 2025 and gradually decreasing to 1.5% in 2030 and beyond. This aims to curb debt growth, organise public finances, and ensure long-term fiscal sustainability.
Fiscal consolidation paths as set out in successive reforms of the Social and Fiscal Responsibility Law
Source: Law 185 of November 2020, Law 445 of 2024.
Reassignment of resources of the General State Budget 2020 to face the COVID-19 emergency. Restructurings of around USD 2 billion in 2020 and USD 825 million in 2021 were destined to COVID-19 spending.
Use of the resources of Panama’s sovereign wealth fund. For the first time since its creation, the National Assembly authorised the government (in April 2020) to use the resources of Panama’s sovereign wealth fund (Fondo de Ahorro Panamá) to attend the emergency (see Law 139 of April 2020). As of September 2020, total withdrawals amounted to USD 105 million.
Securing external financing to mitigate economic impacts. In early 2020, the government sought external financing from multilateral organisations, including:
credit lines for USD 41 million from the World Bank through the Development Policy Loan with a Catastrophe Deferred Drawdown Option (CAT DDO);
USD 300 million from the Inter-American Development Bank (IDB) to support micro and small businesses (USD 150 million) and the agriculture sector (USD 150 million);
USD 515 million from the IMF under the Rapid Financing Instrument (RFI); and USD 250 million from the Central American Bank for Economic Integration as part of its Development Policy Operations Program and,
USD 150 million to strengthen pandemic prevention and containment efforts.
Panama also entered international debt markets in March 2020 with a sale USD 2.5 billion worth of government bonds and in September 2020 with three different operations for a total of USD 2.57 billion. The most significant operations in 2021 included credit lines with multilateral organisations disbursed in September and December of that year, including USD 300 million from the IDB to support gender equality (USD 150 million) and competitiveness and economic diversification (USD 150 million); and the emission (January 2021) of the Global Bonds 2032 and 2060 for USD 2.45 billion and the reopening (June 2021) of a Global Bond 2050 for USD 750 million.
Tax amnesty and discount for the prompt payment of taxes. The tax amnesty period foreseen by Law 99 of 2019 for the late payment of taxes, fees and special contributions of competence of the General Directorate of Revenue (DGI) was extended three times during the emergency (between 29 February 2020 and 31 August 2021). All such unpaid tax obligations from 31 January 2021 and earlier that were settled by August 2021 could take advantage of the tax amnesty extension, saving 85% in interest, surcharges and penalties (see Law 134 of March 2020, modified by Law 160 of September 2020, further modified by Law 208 of April 2021).4 Around 164 448 taxpayers benefited from this tax amnesty over the period March 2020 to August 2021, for a total USD 238.9 million collected and USD 88.6 million forgone (DGI, 2020).
In addition, for taxpayers with earnings below USD 2.5 million, Law 161 of September 2020 (Ley de Pronto Pago) added a 10% discount for the prompt payment of taxes incurred or to be paid between 20 March 2020 and 31 July 2020, if the payment was made before 1 December 2020.5
Source: MEF (2021[17]), Resultados de la Amnistía Tributaria and IMF (2022[18]), World Economic Outlook Database, April 2022.
Extension of the term for the payment of national taxes, rates, special contributions and any other debts of competence of the DGI (Executive Decree No. 251 of 24 March 2020).
Modified loans. Banks could grant the extension of the re-payments of loans, reduce their interest rates and modify their terms without being penalised by having to increase their bank reserves. While there would be no waiver of interests, banks would not apply a surcharge for late payments. The moratoria lasted until 30 June 2021. Thanks to a new agreement between the government and the Superintendency of Banks, citizens in vulnerable situations were then granted until 31 December 2021 to approach their banks in order to restructure their loans.
Creation of a fund for economic stimulus. To safeguard financial stability, authorities created (August 2020) a Special Fund for Banking Sector Stimulus (Fondo Especial de Estímulo al Sistema Bancario) of USD 1 billion, resembling a lender of last resort (LOLR) facility. The National Bank of Panama (BNP), as trustee, could acquire and administer the funds obtained by the MEF to i) provide short-term liquidity lines to banks affected by the COVID-19 crisis (USD 500 million available); or ii) act as a second-floor bank providing credit to banks to encourage them to provide loans to the productive sector (USD 500 million).
The COVID-19 crisis has exposed some of Panama’s structural problems and the importance of strengthening financing for development model. Beyond the short-term fall in revenues caused by the economic slowdown and the increase in expenditures to respond to the crisis, in the medium-to-long term Panama will have to mobilise ambitious resources and improve the efficiency of public spending to build the foundations for a sustainable recovery path. In this context, the country should take advantage of the recovery to strengthen the inclusiveness, resilience and sustainability of its financing for development model, looking at both the impact of the COVID-19 crisis and pre-existing structural challenges.
A comprehensive fiscal agenda based on broad consensus to advance in the post-recovery consolidation path
The fiscal consolidation path set by Panamanian authorities provides a framework for improving the sustainability of public finances, ensuring a strong and resilient recovery, and working towards the achievement of Panama’s development objectives. The 2020 reform of Panama’s fiscal responsibility law set a path to consolidate public finances by 2025. In 2024, the Panamanian economy suffered a deceleration, in large part driven by the closure of the Cobre Panamá mine, which generated 3% of GDP in 2022-23 (MEF, 2025[19]). Given the underperformance of public finances, the 2024 budget was amended to contain costs and the fiscal responsibility law was further reformed. Budget modifications entailed USD 1.4 billion in cost reductions and the recognition of pending payables worth USD 837 million (MEF, 2025[20]). Following Law 445 of 2024, the deficit is constrained to fall to 4% in 2025 and reach 1.5% by 2030 (Asamblea Nacional, 2024[21]). Despite fiscal consolidation in 2024, Panama managed to maintain non-financial public sector capital expenditures at 5.3% of GDP (MEF, 2025[20]) and the approved 2025 budget dedicates USD 8.88 billion to investment. This is lower than investments planned at approval in 2023 (USD 9.4 billion) and 2024 (USD 10.3 billion) but higher than 2022 investment (USD 8.5 billion), reflecting the authorities’ commitment to consolidating public finances in a manner that is compatible to supporting investment in the economy. Expanding fiscal space in the future will therefore be key to ensure that the country is able to finance the recovery while also respecting the limits set in the fiscal consolidation path.
However, the looming effect of the crisis on households and businesses, together with the added complexity brought by higher inflation, makes this process very complex and calls for paying attention to the political economy of a renewed fiscal pact. To respect the fiscal consolidation path and achieve the objectives set in both the Economic Recovery and Reactivation Plans and Panama’s medium-term objectives, the role of fiscal policy must be holistic. Making use of all fiscal policy tools – not only to strengthen tax revenue collection, but also to improve the efficiency of expenditures and underpin the sustainability of debt – will be key for an inclusive and sustainable recovery. Fiscal measures should be co-ordinated under a well-defined sequence of policies that can be adapted to the different stages of the recovery. Strengthening the credibility of institutions is key to ensure effective policy implementation and increase citizens’ willingness to pay taxes. Finally, a broad consensus and national dialogue surrounding the timing and scope of the required fiscal measures are important not only for the immediate recovery of the crisis, but also for ensuring the longer-term sustainability of these policies (OECD et al., 2021[22]; Nieto-Parra, Orozco and Mora, 2021[23]).
In particular, a comprehensive approach could include a stronger fight against tax evasion and avoidance. In the short term, fighting tax evasion can be a first effective step to strengthen public finances in Panama without increasing the tax pressure on households and firms. In 2020, 29.8% of the population reported knowing someone who managed to avoid paying taxes, up from 19.3% in 2010 (Latinobarómetro, 2021[24]). Among the 12 LAC countries surveyed, Panama was the country with the highest estimated level (45.3%) of VAT non-compliance in 2016 and 2017, compared with a regional average of around 30% and an average of just 11.5% in the European Union (28 countries). Taking 2009 figures as a benchmark, the trend in VAT non-compliance has increased by 40% in Panama (similar to the Dominican Republic), while it has decreased by around or under 20% in Chile, Mexico and Uruguay. Estimated tax revenue losses due to VAT non-compliance in Panama were equivalent to 2.2% of GDP in 2016. Similarly, the evasion rate for corporate income tax was 72.7% in Panama in 2016 and the tax gap generated stood at a striking 5.8% of GDP. With regard to personal income tax, the evasion rate was somewhat lower, at 33.4% in 2016, equivalent to a tax gap of 0.8% of GDP (ECLAC, 2020[25]).
Strengthening the capacities of the tax collection authority, the Dirección General de Ingresos (DGI), in the fight against tax evasion and avoidance is key to strengthen domestic revenue mobilisation without increasing the tax burden in the country. Among other efforts, it is important to update the DGI’s Strategic Plan with clear objectives for supporting the post-COVID-19 recovery and a strong mandate in the fight against tax evasion.
Some steps have already helped to increase tax collection in the last decade. In 2016, to increase the DGI's VAT collection efforts, the government introduced a mechanism to partially withhold the VAT of the 160 largest companies, resulting in additional VAT collection of around USD 100-200 million (0.2‑0.4% of GDP) (OECD, 2017[26]). In 2019, tax evasion for amounts above USD 300 000 was elevated from the administrative to the criminal sphere, helping to align Panama’s regulation with international standards (see Law 70 of January 2019). The gradual introduction (in 2022) of mandatory e-invoicing in Panama is a further welcome step in the fight against tax evasion. However, it will have to be complemented by investments in a stronger and modern tax administration to ensure that the benefits of the e-invoicing scheme outweigh its costs.
Continuing to implement the Base Erosion and Profit Shifting (BEPS) Recommendations could also benefit Panama in fighting international tax evasion. BEPS refers to tax planning strategies used by multinational enterprises to exploit gaps and mismatches in tax rules, allowing them to shift profits to low or no-tax locations where there is little economic activity or to erode tax bases through deductible payments like interest or royalties. These practices, while often legal, undermine the fairness and integrity of tax systems and disproportionately impact developing countries due to their reliance on corporate income tax. The OECD/G20 Inclusive Framework on BEPS has developed a BEPS Package comprising 15 Actions designed to combat tax avoidance, enhance the coherence of international tax rules, ensure transparency, and address challenges posed by the digital economy. As of May 2024, only Actions 5 and 15 had been fully implemented, while Actions 6, 13 and 14 had been partly implemented (CIAT, 2024[27]).
Broadening the tax base and reducing tax exemptions could also be considered within the recovery strategy. In the medium term, assessing tax exemptions and gradually eliminating those that result in harmful or inefficient tax expenditures could help to expand the tax base and free up fiscal space for financing a sustainable and resilient recovery. Tax exemptions relative to preferential tax treatments in Panama resulted in forgone revenue equivalent to 3.09% of GDP in 2019 (Redonda, von Haldenwang and Aliu, 2021[28]), leaving significant space to streamline incentives and strengthen public finances. As these exemptions disproportionately benefit the wealthiest deciles, their elimination could also improve the redistributive potential of the tax system (OECD, 2018[12]). As the MEF does not officially report on tax expenditures and does not include all items related to tax benefits in its estimates, a crucial issue in Panama lays in measuring the fiscal costs associated to these exemptions in a clear and transparent way (OECD, 2018[12]). Frequent tax amnesties should also be discouraged as they tend to decrease the tax morale of taxpayers.
Panama could gradually shift the composition of its tax revenues. Beyond the poor tax revenue collecting efforts in comparison to LAC and OECD areas, Panama’s tax structure is currently highly dependent on social security contributions (SSC), while personal income tax (PIT) and VAT could be increased. In 2022, SSC represented 42.0% of total tax revenues (or 5.5% of GDP) vs 16.7% (or 3.6% of GDP) in LAC and 24.8% (or 8.7% of GDP) in the OECD. In turn, VAT (known as ITBMS in Panama) and other taxes on goods and services were among the lowest in the region, representing 26.4% of total tax revenues (or 3.5% of GDP), below averages of 47.0% (or 10.1% of GDP) for LAC and 31.5% (10.6% of GDP) in OECD. Moreover, PIT represented 14.1% of total revenues in Panama, but only 1.9% of GDP, below the LAC average of 2.0% and OECD average of 8.2% (Figure 4.5).
Tax structure and composition in Panama, the LAC and OECD averages, 2022
Source: OECD et al. (2024[13]), Revenue Statistics in Latin America and the Caribbean 2024, https://doi.org/10.1787/a7640683-en.
As a tax with large collection potential, VAT can be an important source of revenues to finance Panama’s recovery and long-term development. Particularly in contexts of high informality, where the tax base is reduced, VAT can help collect revenues from the informal sector as it taxes goods and services bought by informal businesses. It can also present an incentive to formalise informal firms that do business with formal firms and wish to request input VAT recovery.
Significant gains could be made by increasing VAT rates and, in turn, strengthening targeted social assistance programmes for poor households to compensate the regressive nature of VAT. The VAT rate in Panama, at 7%, is one of the lowest in the region, leaving significant space for improvement. Innovative payment methods put in place during the COVID-19 crisis could provide effective mechanisms for VAT compensation to poor and vulnerable households. The transfer of the digital voucher (Vale Digital) of the Panamá Solidario programme on the ID card (cedula) allowed beneficiaries to use this means to pay for their groceries. In turn, the ID card could allow the government to track beneficiaries’ expenditures and could be an effective tool of VAT refund. Colombia has already put in place a similar VAT refund mechanism for the poorest households. Around 700 000 of the poorest households benefiting from the social programme Familias en Acción and 300 000 priority households of the programme Colombia Mayor benefit from bimonthly VAT refunds equivalent to around USD 21 (COP 80 000) (Prosperidad Social, 2022[29]).
Improving environmental tax collection could help further increase revenues while also promoting more efficient use of resources and advancing towards a more sustainable economy. Environmentally related tax revenues in Panama remain among the lowest in the region, representing around 0.37% of GDP in 2020 vs. 1.02% in LAC and 1.92% in the OECD. In particular, significant space exists to improve taxes related to resources and pollution. Taxes related to energy could also improve, as they represented 0.24% of GDP in 2020 in Panama vs 0.76% in LAC and 1.37% in the OECD (Figure 4.6).
If not well managed, however, phasing off energy subsidies could generate some short-term distributional effects and stir social discontent. Informing citizens about the benefits of these green policies, while also putting in place alternative safety nets to mitigate their potential negative impact on poor households, is key to avoid political resistance and win broad political support for green tax reforms. These subsidies could be replaced by more targeted and cost-efficient instruments, such as direct conditional and unconditional cash transfers, to help lower-income households. The redirection of subsidies towards social programmes could also help increase the political acceptability of these reforms.
Environmentally related tax revenue in Panama, LAC and OECD areas as a share (%) of GDP, 2022
Note: The LAC average represents the unweighted average of 25 LAC countries included in this publication but excludes Cuba and Venezuela due to data issues. The figure does not include Jamaica’s revenues from the special consumption tax on petroleum products (estimated to be more than 2.0% of GDP in 2018) as the data are not available. The OECD average represents the unweighted average of the 38 OECD member countries, which includes Chile, Colombia, Costa Rica and Mexico.
Source: OECD et al. (2024[13]), Revenue Statistics in Latin America and the Caribbean 2024, https://doi.org/10.1787/a7640683-en.
Increasing the quality, effectiveness and efficiency of public spending can help raise the well-being of Panamanian citizens. More effective and efficient public spending can also help strengthen the fiscal pact between citizens and the state by increasing satisfaction with public services and raising citizens’ willingness to pay taxes – known as “tax morale”. The share of citizens satisfied with the quality of healthcare in the city or area where they lived was 49% in 2021, down from 65% in 2011. Similarly, the share of citizens satisfied with the education system decreased from 73% in 2011 to 65% in 2019 and experienced a sharp fall during the pandemic, reaching 58% in 2021 (Gallup, 2022[30]). Better spending can help to increase citizen well-being and improve the credibility of public institutions, thereby generating a virtuous circle by which citizens become more willing to pay the taxes needed to finance quality public services (OECD et al., 2019[31]).
General government public expenditure in Panama has increased (especially since 2015) and the structure of public spending has evolved, with social protection and health growing in importance. Total public expenditure has increased from 19% of GDP in 2000 to 27% in 2017, although it remains below the LAC average (8 countries) of 32% (Figure 4.7). In particular, spending on social protection, which had remained around 1% of GDP over 2010-14, increased to 5% in 2015 and 6% in 2017. Spending on health doubled, from 2% of GDP in 2000 to 4% in 2017. Spending on education increased more slowly, from 4% of GDP in 2000 to 5% in 2017. At the same time, spending on general public services halved, from 8% of GDP in 2000 to 4% in 2017 (Figure 4.7, Panel A).
General government public expenditure by sector, as a share of GDP, 2000-17
Note: Due to limited data availability, LAC is a simple average of eight countries, including Bolivia, Brazil, Colombia, Costa Rica, Cuba, Panama, Paraguay and Peru. No data available beyond 2017.
Source: ECLAC (2021[32]), CEPALSTAT (database), https://statistics.cepal.org/portal/cepalstat/dashboard.html?theme=2&lang=en.
In the short term, increasing social transfers has been key to support households during the emergency; in the medium term, it is important that Panama shifts towards more targeted transfers, to those sectors and socio-economic groups most in need. In 2019, central government current expenditures represented 11.3% of GDP while capital expenditures represented 5.5%. These figures increased in 2020 to 15.1% and 6.7%, respectively, especially due to increases in wages, acquisition of fixed assets, subsidies and current transfers (Figure 4.8). In the medium to long term, changing the composition of expenditure will be vital, in favour of greater capital expenditure which has higher multiplier effects than current expenditure. Containing the public sector wage bill, which has steadily increased since 2013 from 3.9% of GDP to 4.8% in 2019, will also be a key issue. Central government spending on wages and salaries swelled to 6.6% of GDP in 2020 (ECLAC, 2021[32]), due to contingency hires to face crisis.
Percentage points change, as a share (%) of GDP
Source: ECLAC (2021[32]), CEPALSTAT (database), https://statistics.cepal.org/portal/cepalstat/dashboard.
To increase the efficiency of public spending, introducing a results-based budgeting process (presupuesto por resultados) is well-suited and should be no further delayed. After multiple postponements, the government began piloting implementation of this approach within 12 entities for the 2023 budget and 19 for the 2024 budget (MEF, 2021[33]). This will help to strengthen management and the ability to monitor and evaluate the outcomes achieved against a set of expected objectives. As a single year perspective provides a poor basis for sound fiscal planning, a robust medium-term budget framework could bolster fiscal discipline.
To ensure greater adherence to the fiscal framework and avoid excessive use of escape clauses, the government could also embed safety margins for cyclical problems (IMF, 2021[34]). The creation (2018) of a fiscal council is a step in the right direction. Full implementation of the Law 68 of 2018 could help promote transparency and accountability of the fiscal framework.
Continuing to improve financial transparency is also key. The Government Strategic Plan 2025-29, under the strategic pillar of Efficient governance and strengthening of institutions (Gobernanza eficiente y fortalecimiento institucional) focuses on the importance of reinforcing transparency and the tax administration. This builds on progress made during the 2019-24 period on anti-money-laundering (AML) initiatives, among the key actions to increase Panama’s legitimacy and credibility at the international level. In June 2019, Panama was put back on the grey list of the Financial Action Task Force (FATF), the global watchdog that sets international standards to prevent money laundering and terrorist financing and mitigate their detrimental impact on society. Following the government’s high-level political commitment to work with the FATF and the Financial Action Task Force of Latin America (GAFILAT), to strengthen the effectiveness of its AML/CFT regime, and recognising the progress made by Panama, including the application of a risk-based supervision of the DNFBP sector and the increase in parallel investigations into the predicate crime and money laundering offense, the FATF removed Panama from the list of jurisdictions under increased monitoring in October 2023 (FATF, 2023[35]). However, as of the end of 2024, Panama remains in the European Union’s list of high-risk third countries despite a positive assessment made by the European Commission in March 2024 (European Commission, 2024[36]). It is also key that Panama continues to improve its financial and tax transparency initiatives, in order to exit the European Union’s list of non-cooperative tax jurisdictions. This will also help avoid potential negative effects on the profitability of banks as a consequence of IFIs curtailing their interactions with Panamanian banks or enhanced due diligence applied to business relations and transactions with Panama. This is also in line with the Reactivation Plan and the proposals made by the Finance Sub-commission (CONeP, 2021[37]).
Building on the framework for public-private partnerships is vital. Until 2019, Panama was one of only two LAC countries (the second being Venezuela) to not have a specific legislation relative to public-private partnerships (PPPs). In fact, PPPs were usually implemented under a general and outdated legislative framework on concessions (Law N. 5 of 1988). However, Executive Decree N. 840 of December 2020 (which regulates Law 93 of 2019) establishes a regulatory and institutional framework for developing PPPs and provides a complementary resource for the government to finance the provision of public goods. The establishment (in 2020) of a PPP framework is a welcome step in achieving the infrastructure objectives set out by Panama’s development planning and highlights the importance of continuing to work towards a medium-to-long-term vision for development in Panama. Phase I of the PPP programme will amount to around USD 1.5 billion for projects. One example is the 2 000 km Standard Maintenance Program, a highway that connects the districts of Arraiján and La Chorrera and the Corredor Norte de David in the province of Chiriquí (MEF, 2021[2]). The mechanism for determining the eligibility of PPPs is based on a “value for money” approach that can help determine which mode of financing is most appropriate. To strengthen the credibility and sustainability of PPPs in the medium to long term, these eligibility evaluations must be clear, transparent and objective, especially in the context of the COVID-19 crisis.
The cost of indebtedness has increased compared to before the COVID-19 crisis
Sustainable debt management can help economies achieve long-term socioeconomic progress while investing in infrastructure and housing, smoothing consumption, or coping with climate and health emergencies. Despite the COVID-19 crisis, the Panamanian government succeeded in accessing the international bond market at favourable rates. High international liquidity and greater investor appetite towards sovereign bonds in emerging markets during the pandemic contributed to this positive trend.
As Panama’s public debt increased during the COVID-19 crisis, continuing to assess its sustainability will be key. As of December 2024, total public debt amounted to USD 53.7 billion, of which 17.6% was domestic and 82.4% was external (Figure 4.9, Panel A). Notably, the government has managed to increase the maturity of its debt portfolio at a lower cost. The average time to maturity (ATM) increased from 10.9 years in 2019 to 12.8 years in 2020, 13.3 years in 2021 and 13.79 years in June 2022, and stood at 12.53 at the end of 2024 (MEF, 2024[38]). At the same time, the weighted average cost of the debt portfolio decreased from 4.6% in 2019 to 4% in 2020 and 3.89% in 2021, before increasing slightly to 3.98% in June 2022 and increasing further to 5.27% at the end of 2024 (MEF, 2022[39]; MEF, 2024[38]). As of December 2024, the debt portfolio contracted at a fixed rate represented 81.24% of the total while 18.76% was contracted at a variable rate (MEF, 2024[38]).
The composition of Panama’s foreign creditors has not changed much in the past decade and is in line with other countries with good access to the international bond market. As of January 2025, private creditors, including bondholders (75%), held the largest share of Panama’s long-term public or publicly guaranteed external debt (Figure 4.9, Panel B). The monetary tightening started by the Federal Reserve System of the United States, together with Russia’s war of aggression against Ukraine and its effects on the volatility of primary commodities (especially oil), have resulted in the appreciation of the USD. The exchange rate variation triggered a decrease – of USD 3.4 million in October 2022 – in the public debt portfolio due by Panama (MEF, 2022[40]). Going forward, a tighter monetary policy in the United States and other major global economies could result in higher reference rates (London Interbank Offered Rate (LIBOR) and Secured Overnight Financing Rate [SOFR]) and increased costs for financing.
Note: For Panel C, all debt figures correspond to debt issued by central governments and the central banks. Subnational debt and liabilities of state-owned enterprises (SOEs) are excluded. Central bank non-monetary liabilities are included.
Source: MEF (2024[42]), Public Debt, https://fpublico.mef.gob.pa/en for Panel A; MEF (2025[43]), Informe mensual de deuda pública del SPNF, al 31 de enero de 2025, https://fpublico.mef.gob.pa/reportes/Informes%20Deuda/Informe%20Enero%202025.pdf for Panel B; and IDB (2021[44]), Latin America and the Caribbean Standardized Public Debt Database, https://publications.iadb.org/en/latin-america-and-caribbean-standardized-public-debt-database-data-december-2022 for Panel C.
Panama has historically issued a greater share of bonds in USD and under foreign law compared to those in other currencies and governed by internal legislation. As of end 2024, only 1.4% of Panama’s debt was denominated in a currency other than USD (MEF, 2024[41]) and total debt issued under foreign law was four times higher than debt issued under internal legislation. This is a sharp contrast to other LAC countries such as Chile, Colombia, Costa Rica and Peru (Figure 4.9, Panel C). Foreign-law bonds tend to give greater legal protection to investors and therefore allow governments to borrow at lower rates, especially in distress periods.
Panama’s sovereign spreads followed regional trends during the COVID-19 crisis but have increased since the end of 2023. Country risk, as measured by the Emerging Market Bond Index (EMBI) spread kept pace with Peru and Chile in the pandemic period, despite an increase in September-October 2022; it was below 250 basis points in December 2022, close to pre-pandemic levels. However, the spread increased in the recovery period and averaged 272 basis points in 2024, 1.4 p.p. above pre-crisis levels and well above the levels of Chile or Peru (Figure 4.10, Panel A). Similarly, Panama’s sovereign rating deteriorated in March 2024 after Fitch Ratings downgraded Panama’s long-term foreign currency rating to BB+ from BBB-, reflecting fiscal challenges that were aggravated by the closure of the country’s largest mine. The yield curve of external bonds (in dollars) has the typical upward slope shape. External bonds on the long end yield about 7.6% while on the short end they are just over 5%, reflecting an increase in borrowing costs relative to recent years. The maturity structure of public debt shows a greater share of principal and interest payments due in 11 or more years (Figure 4.10, Panel B). This implies a lower rollover risk (where the terms of financing are renegotiated to the detriment of the borrower) and a higher ability to undertake long-term investment (MEF, 2024[45]).
Source: Bloomberg for Panel A; IDB (2021[44]), Latin America and the Caribbean Standardized Public Debt Database for Panel B, http://dx.doi.org/10.18235/0003600.
Increases in sovereign bond spreads entail a more costly debt service, and the cost of debt service is already high in Panama. Panama’s public finances are highly dependent on sovereign spreads as external public debt represents more than 80% of total public debt and most creditors are bondholders. Moreover, debt service as a percentage of tax revenues has increased by more than 2.5 percentage points between 2016 and 2022, reaching 13.1%. The ratio remains high compared to the LAC region (12.2%) and OECD (4.8%), and the increase has also been more significant than in the LAC region (less than 1 percentage point for the same period) (OECD et al., 2024[46]). To promote credibility in fiscal policy and therefore reduce the cost of borrowing in international markets, the Ministry of Economy and Finance has reaffirmed the government’s commitment to financial discipline and responsible regulatory frameworks that ensure economic stability and well-being of the population (MEF, 2024[47]).
The banking system remains solvent
Continued supervision of the financial system is important to stave off emerging risks. The government moratorium on servicing bank loans was de facto extended until 31 December 2021, but NPLs increased only slightly since 2022 (Figure 4.4, Panel A). In parallel, the ad-hoc requirement to create a provision equivalent to 3% of the gross modified loan portfolio resulted in an increase of banks’ provisions as a share of NPLs – from 102% in 2019Q4 to 156% in 2021Q1 and 141% in 2022Q2 – thereby helping prevent excessive build-up of risk (Figure 4.11, Panel A). Higher provisions, together with more complex operating conditions, resulted in lower bank profitability during the COVID-19 crisis. The return on assets decreased from 1.5% in 2019Q4 to 0.7% in 2020Q4, then increased to 2% in 2022Q2 (Figure 4.11, Panel B).
Overall, banks in Panama remain solvent, with a capital adequacy ratio above the minimum Basel III requirements. The capital adequacy ratio increased from 15.2% in 2019Q4 to 16.3% in 2021Q2, then slightly decreased to 14.9% in 2022Q2 (Figure 4.11, Panel C). The liquid asset ratio (i.e. the share of liquid assets to total assets) increased from 10% in 2019Q4 to 11.6% in 2021Q2, then decreased to 10.6% in 2022Q2 (Figure 4.11, Panel D). Creation of the Fund for Economic Stimulus, resembling a lender of last resort (LOLR) facility, further staved off the risk of liquidity drying up during the COVID-19 crisis. Going forward, in order to stand ready to adjust capital buffers and provisions accordingly, Panama will need to closely follow the share of NPLs and assess the credit exposures of banks to modified loans.
Source: IMF (2024[15]), Financial Soundness Indicators, https://data.imf.org/regular.aspx?key=63174545.
Towards a national carbon market
Despite being carbon neutral, Panama can further increase its ambition and leverage the recovery to develop an appropriate low-carbon infrastructure that helps direct spending and investment toward sustainable and green development. In the 2020 update to its Nationally Determined Contribution (NDC), Panama established a roadmap towards reaching carbon neutrality in 2050, including integrated mitigation-adaptation commitments for 10 sectors, with a special focus on energy (MIAMBIENTE, 2021[48]). The recent update of its GHG emissions inventory for the period 1994-2017 finds Panama to be carbon neutral, but space still exists to increase its ambition and explore new ways to mobilise public and private resources towards financing a greener economy.
The Ministry of Environment has been making steps towards reaching the targets set for 2025 in the NDC, including a manual for identifying climate change expenditures in the budget and embedding climate variables in the National System of Public Investments (SINIP). In 2020, the Ministry of Environment published a guide and a detailed methodology to apply criteria of vulnerability, risk, adaptation and mitigation in public infrastructure works (MIAMBIENTE, 2020[49]). In 2021 it also published a manual to identify, classify and highlight expenditures relative to climate change in the government budget. In co-operation with the MEF, this project will help to better supervise the government’s fight against climate change and could inform climate policy making. Since December 2021, some practical workshops were carried out with a view to fully operationalise the manual in future government budgets (MIAMBIENTE, 2021[50]).
Panama is also working on establishing the foundations for the national compensation system and a national carbon market. The system is under the responsibility of the ministry of the environment, as detailed in Executive Decree 100 (Executive Decree 100 or 2020 (MIAMBIENTE, 2020[51])) which also regulates Panama’s main programme for managing GHG emissions (Reduce Tu Huella [Diminish your footprint]) as well as the main systems for recording emissions and mitigation actions, which are accessible through an Internet platform (the National Climate Transparency Platform (MIAMBIENTE, n.d.[52])). The normative framework for the carbon market (Bolsa Panameña del Carbono [BPC]) was established in 2021 (MIAMBIENTE, 2021[53]). The BPC will be a platform for the purchase and sale of carbon credits at national and international levels. The governance structure of the BPC was established in December 2022 and Latinex (the Panamanian stock exchange) was selected as the administrator of the market. The BPC is currently entering a pilot phase.
Potential exists for further developing sustainable debt market instruments
Debt instruments, such as green, social, sustainable, and sustainability-linked (GSSS) bonds, can be used to secure resources linked to a green and resilient recovery from COVID-19 in Panama. Despite a considerable decrease in total LAC bond issuance in international markets since 2021 (falling from USD 149 billion in 2021 to USD 89 billion in 2023), GSSS bonds continue to be an attractive financing mechanism in the region. Their share of total LAC bond issuance increased from 9.3% in 2020 to almost 35% in 2023. For issuers in LAC, raising funds through these assets (instead of traditional bonds) has become an attractive option to increase returns on liquid global capital, diversify the investor base, mobilise direct capital into sustainable activities, and acquire financial support for creating sustainable capital markets.
Between 2014 and November 2023, the GSSS international bond market in LAC reached a cumulative value of USD 131 billion (Figure 4.12). In just four years, total green bond issuance almost doubled in LAC from USD 18.8 billion in 2019 to USD 36.1 billion in 2023. Growth was even larger for social, sustainable and sustainability-linked bonds, with a cumulative issuance of USD 95.1 billion in 2023 since the inception of this market segment in 2016, demonstrating the potential for these types of financial instruments in the region (OECD et al., 2024[46]).
Issuance by type and as percentage of total, 2014-23
Note: GSSS refers to green, social, sustainability and sustainability-linked bonds. Total sustainable bonds include blue bond issuances.
Source: (OECD et al., 2024[46]), Latin American Economic Outlook 2024: Financing Sustainable Development and (Núñez, Velloso and Da Silva, 2022[54]), Corporate governance in Latin America and the Caribbean: Using ESG debt instruments to finance sustainable investment projects.
Sovereign GSSS issuance has been increasing as a proportion of total sovereign bond issuance in LAC. Meanwhile, total sovereign issuance has declined considerably since 2021 due to tightening financial conditions and higher borrowing costs. In Panama, sovereign issuance declined from USD 4.4 billion in 2021 to USD 3.9 billion in 2023 (ECLAC, 2023[55]). Despite these challenges, sovereigns in LAC are increasingly opting for GSSS securities. In 2022, sovereign GSSS bond issuance in international markets in LAC accounted for 35.7% of the total sovereign issuance of all types of bonds in international markets. As of November 2023, this figure increased to 58%. In 2023, sovereigns led with a 73% share of total GSSS bond issuance in LAC, followed by corporates (18%) and supranational and quasi‑sovereign issuers (9%) (ECLAC, 2023[56]).
Corporate issuers led the cumulative issuance of GSSS bonds in the period from 2014 to 2023. Until June 2019, all LAC GSSS bond issuances originated in the corporate sector. Since 2020, 25 new issuers have entered the green bond market in LAC, with 19 of them being corporates, indicating the increasing desire of companies for this type of financing (Climate Bonds Initiative, 2022[57]).
In the early stages of thematic bond issuances, green bonds were the predominant tool. However, as a result of the market’s expansion and the onset of the COVID-19 pandemic, attention has shifted from a dominant environmental focus to broader perspectives that include addressing social and sustainability concerns. In 2023, green bonds accounted for only 8% while sustainability-linked bonds represented the largest share (39%), followed by sustainable bonds (33%) (ECLAC, 2023[56]; OECD et al., 2024[13]).
Within the category of GSSS assets, sustainability-linked bonds (SLBs) stand out, providing issuers with the opportunity to redirect capital flows to achieve multiple sustainable objectives simultaneously, while also offering the possibility of obtaining coupon discount rewards (Box 4.2). Unlike green, social and sustainable bonds, which require underlying assets, SLBs can be backed by an issuer’s entire balance sheet, allowing them to be issued in higher values and with longer maturities (OECD, 2024[58]). Moving forward, innovative approaches to SLBs can offer sovereign issuers the opportunity to fulfill national government commitments under their NDCs, while also helping to promote the long-term sustainability of their sovereign debt. These instruments have the potential to bolster domestic revenue mobilisation, enhance the effectiveness and efficiency of expenditure, and align investments with the priorities of national sustainable development (S&P Global Ratings, 2023[59]).
In November 2022, Uruguay issued its first SLB indexed to indicators of climate change (BIICC). Alongside Chile, Uruguay made history as the world's first nations to issue sovereign SLBs. The issuance attracted 188 investors from Europe, Asia, the United States and Latin America, of whom 21% were new buyers of the country's debt. The country received demand totalling USD 3.96 billion, significantly higher than the USD 1.5 billion it decided to issue (IDB, 2022[60]).
The Ministry of Economy and Finance (MEF) of Uruguay collaborated with the IDB to prepare the issuance’s framework. The SLB comprises two key performance indicators (KPIs): KPI‑1 is linked to reducing GHGs (goal for 2025) relative to the reference year (1990); and KPI‑2 is linked to protecting native forests (goal for 2025), relative to the reference year (2012). Both KPIs are associated with Sustainable Performance Targets (SPTs), which, in turn, are linked to the quantitative objectives established by Uruguay for 2025 in its commitments under its NDC and the Paris Agreement (MEF, 2024[61]).
The issuance is financially innovative as it employs a step-up/step-down approach, wherein the bond's coupon decreases if the government surpasses the KPIs targets and increases if the government fails to achieve the goals. For example, concerning KPI‑1, which pertains to the total reduction of GHGs, if Uruguay fails to meet the target of reducing GHGs by 50% by 2025, the bond's interest rate will increase by 15 bps. If the country achieves the target but does not exceed a reduction of 52%, the interest rate will remain unchanged. However, if it achieves a reduction greater than 52%, the interest rate will be reduced by 15 bps. This innovative financial design incentivises sovereign issuers to meet proposed sustainable goals while also enhancing access to financing by attracting a larger pool of investors, including institutional investors that may not have otherwise participated.
Among other advantages, Uruguay’s development process also strengthened co-ordination among different government entities – both before and after the bond issuance – as several ministries are responsible for joint monitoring and issuing joint publications. Additionally, the process guarantees scalability as the proposed KPIs become increasingly ambitious following updates to the country’s commitments under its NDCs.
Finally, the value of this type of SLB also lies in its embedding within a framework aimed at avoiding “green/SDG-washing”. The structure of Uruguay's SLB framework, which established the development and implementation of a robust ex ante and ex post reporting and verification system, aims to ensure that funds are truly utilised appropriately. The first annual results report (published in May 2023) allows investors to monitor progress towards quantitative goals. An external verification report, conducted by the United Nations Development Program (UNDP) confirmed figures for both KPIs. KPI-2 was also verified in consultation with a secondary source of best practices, the guiding principles of the Global Forest Observations Initiative (GFOI).
Source: Policy workshop “Financing Sustainable Futures: The Role of GSSS Bonds in Mobilising Public and Private Capital Towards a New Model of Development”.
With 14 issuances, Panama’s cumulative GSSS issuance totalled USD 379 million in 2022. The first social bond came to the market in 2019, with a USD 50 million issuance from Banistmo to finance women-led SMEs. It also represented the first social gender bond in LAC. In the same year, Panama also entered the green bond market with the Panama Stock Exchange listing its first green bond, issued by a non-bank financial institution, the Corporación Interamericana para el Financiamiento de Infraestructura (CIFI). As of 2022, Panama’s green bond market was worth USD 329 million, with three issuers; the social bond market was worth USD 50 million, with one issuer. This is still far below Peru, with USD 1.1 billion and five issuers in the green bond market, USD 67.9 million and three issuers in the social finance market, and USD 5.4 billion and six issuers in the sustainability and sustainability-linked bond finance market. Together with Chile and Mexico, Brazil remains home to the largest GSSS market in LAC. Notably, while proceeds from most countries (including Panama) entering the sustainable debt market are going to the energy sector, Brazil, Chile, Ecuador and Mexico prefer diversifying their investments (Climate Bonds Initiative, 2022[57]).
In moving forward with expanding GSSS bonds, Panama requires investment-ready and bankable projects. Considering Panama's plans for issuing sustainable bonds, and drawing on past experience from issuing green and blue bonds, the challenge lies in identifying potential projects that could fall under this new “sustainable” label. To work towards a solution, it is important to increase collaboration among ministries and the national public investment office. This collaboration can be crucial for jointly identifying projects with environmental impacts, assessing their capacity and scale, and allocating them accordingly (Box 4.3). This would also allow for a clearer understanding of investment priorities.
As part of the project "A New Sustainable Development Model for the Post-COVID Era in Panama and Paraguay," the OECD Development Centre organised an international online workshop (18 October 2023) entitled "Financing Sustainable Futures: The Role of GSSS Bonds in Mobilising Public and Private Capital Towards a New Model of Development," in collaboration with the governments of Panama and Paraguay. It aimed to facilitate regional-level exchange on the benefits and opportunities of sustainable finance and foster constructive dialogue on practical tools to drive the issuance of GSSS bonds in both countries. Essential topics, such as the structuring of these types of bonds, eligibility criteria tailored to each country's priority areas and the need for enhanced co-operation, were addressed. The discussions brought forth perspectives from a variety of stakeholders, including representatives from international organisations, the public sector and development banks.
The workshop discussion revealed crucial insights for “greening” the financial system, exposing the main challenges involved in promoting the development of new sustainable products and emphasising the need to enhance regulatory and institutional frameworks:
Concerning the challenges associated with developing bankable, investment-ready projects, collaboration between ministries and the office for public investment is key for project feasibility planning. Even if taxonomies are developed or investment appetite is consolidated, prioritising this project planning is essential; otherwise, resources will lack direction. Advancing in the development of data and metrics to accurately identify projects and their needs is also vital.
Strong overarching institutional frameworks need to be developed around sustainable finance strategies to keep regulations, metrics and a data repository updated. This reflects the dynamic and evolving environment in which sustainable finance strategies operate.
Establishing a consolidated national strategy on sustainable finance requires the participation of all stakeholders, including institutional investors and insurers. Developing a common language among both bank and non-bank financial stakeholders and international peers is essential for advancing this strategy.
In developing a common language, it is crucial to establish green or sustainable taxonomies and economic, social, and governance (ESG) standards that accurately reflect the sectoral priorities and vulnerabilities of a given country. This is essential for clearly defining terms of engagement for investors.
Regional standardisation and harmonisation of sustainable finance frameworks are key to improving interoperability with global taxonomies and standards. This also reduces transaction costs for interested investors while fostering participatory processes and collaborative work across financial stakeholders.
More consolidated sustainable finance frameworks are essential for building trust and transparency. A clear legal and regulatory framework lends credibility and instils trust, thereby boosting foreign investment. Developing tracking, monitoring and verification systems to oversee all types of sustainable instruments is fundamental in preventing green/SDG-washing.
The issuance of both sustainable bonds and SLBs offers issuers the opportunity to encompass a wider range of projects and attract a more diversified investor base.
Fostering sustainable instruments that drive the development of the local capital market is crucial. In turn, it is important to invest in technical and technological capacities that can measure the impacts of financing from debt instruments in the local market. Doing so can facilitate the establishment of local governance and investment culture mechanisms.
Source: Authors’ elaboration.
Developing a harmonised and inclusive sustainable finance framework can enhance the attractiveness of Panama’s capital markets
Panama has advanced significantly in consolidating its sustainable finance framework, which is essential for regulating, monitoring, and verifying the issuance of GSSS bonds and other sustainable finance instruments (Box 4.4). It has already developed national guidelines for both the banking sector and the non-bank financial sector, focusing on a crucial aspect of the sustainable finance framework: economic, social, and governance (ESG) risk management. In the banking sector, the Panama Banking Association (ABP) launched the Sustainable Finance Protocol in 2018, setting expectations for integrating the consideration of ESG risks and performance, and establishing recommendations regarding the adoption of best practices (Panama Banking Association, 2018[62]).
For the non-bank financial sector, the Panama Stock Exchange (BVP, now Latinex) released its Guidelines for Voluntary Reporting and Disclosure of ESG Factors in 2021, following similar steps taken in Colombia, Ecuador and the Dominican Republic (Panama Stock Exchange, 2021[63]) This document also offers guidance on climate risk disclosure in line with international practices. The stock exchange's contribution to the national framework represents a significant step towards a more inclusive framework, endorsed by a wider variety of financial stakeholders.
Regarding the dimension of financing sustainability in its national framework, Panama has taken significant steps to define standards for the issuance of GSSS bonds, as well as to develop a sustainable taxonomy. Panama’s financing sustainability framework currently encompasses the banking sector and capital markets, guided by Panama’s Banking Association’s Sustainable Finance Protocol (released in 2018) and the BVP’s Guidelines for the Issuance of Social, Green, and Sustainable Securities (launched in 2019) (Panama Stock Exchange, 2019[64]). The BVP’s guidelines provide a list and examples of sustainable finance assets, along with technical guidance for the issuance of GSS bonds. Additionally, Panama has established a Sustainable Finance Working Group to ensure the development of an approach to financing sustainability within the Panamanian financial sector and its national framework. This group has been instrumental in promoting engagement on the topic of sustainable finance among key stakeholders, with regulators, government agencies and industry associations serving as active members.
In 2024, Panama published a national sustainable finance taxonomy, guided by the LAC Common Framework of Sustainable Finance.6 The Ministry of Environment, the Working Group on Sustainable Finance of Panama, the Superintendency of the Securities Market of Panama, the Superintendency of Banks, and the Superintendency of Insurance and Reinsurance, in collaboration with the United Nations Environment Programme (UNEP), were actively engaged in developing the taxonomy, which underwent public consultation until December 2023. In this initial phase, the taxonomy establishes eligibility criteria for economic activities that substantially contribute to climate change objectives, including mitigation and adaptation. These activities are grouped under eleven economic sectors: land use (livestock, agriculture, and forestry); transport; construction; waste management and emissions capture; manufacturing; information and communication technology (ICT); water supply and treatment; supply of electricity, gas, steam, and air conditioning; and financial and insurance activities. The taxonomy serves as a valuable tool for investors, financial institutions, public entities and other stakeholders, facilitating the identification of sustainable investments (Superintendencia de Bancos de Panamá, 2024[65]).
Going forward, Panama should continue advancing in the implementation and regional harmonisation of its taxonomy, protocols, and standards, as well as in developing and implementing monitoring and verification mechanisms for sustainable debt instruments. Under the guidance of the regional Common Framework of Sustainable Finance Taxonomies (released in June 2023 by the UN system), the country can work to harmonise and align its national framework with that of others in the LAC region (OECD et al., 2023[66]) This can ensure a transparent flow of sustainable finance, especially from the private sector. Establishing robust monitoring and verification systems is vital to maintain market transparency and prevent green/SDG washing. Implementing pre- and post-issuance external reviews is essential. More consolidated frameworks have the potential to cut transaction costs, enhancing the attractiveness of the country’s capital markets.
Sustainable finance frameworks are customised roadmaps designed to align funding with a country's sustainable development goals, considering its specific needs and potential. These frameworks target three main pillars: I) economic, social, and governance (ESG) integration, which involves managing ESG risks in the governance, operations, lending, and investment activities of financial institutions; II) climate risk management, which entails adopting new governance, risk management, and disclosure practices to help financial institutions mitigate and adapt to climate change; and III) financing sustainability, which encompasses initiatives by regulators and financial institutions to mobilise capital for activities that support climate action, the green economy, and social goals. A fully consolidated framework is enabled by various mechanisms, including national taxonomies, policies, voluntary guidelines, protocols, and regulatory requirements, among other initiatives. These mechanisms can be developed by the private sector, the public sector, or a combination of both. They may target specific production sectors or be more general and include:
National green, transition or sustainable taxonomies: National taxonomies define the criteria for environmentally sustainable investments and provide a framework to assist stakeholders in the real economy and financial sector in identifying economic activities and investments that support the achievement of the country's environmental and social goals. Additionally, besides guiding the country’s investments, it can also serve as a roadmap for investments by individuals, companies, or entities. Various actors from both the public and private sectors, including bond issuers, investors, financial institutions, public entities, among others, can utilise it for investment identification and evaluation purposes (OECD et al., 2022[67]).
ESG risk management regulation: ESG risk management regulation mandates both public and private sector entities to assess and mitigate environmental, social, and governance risks, aligning with broader societal and environmental goals. Sustainable finance is expanding beyond banking to include capital markets, insurance, pensions, and asset management. This shift offers opportunities for aligning ESG risk management approaches to unlock sustainable financing across various sectors. It's essential for ESG regulations to clearly define regulators' roles in assessing ESG integration, providing guidance on implementation, offering supervision, incentives for compliance, and tracking progress (SBFN/IFC, 2023[68]).
Planned regulatory guidance on climate/transition risk management and disclosure: Refers to regulatory directives or recommendations to assist public or private entities in managing and disclosing climate-related risks for transitioning to a low-carbon economy. This guidance outlines requirements, methodologies, and best practices, aiding businesses and financial institutions in aligning strategies with climate goals and enhancing transparency for stakeholders. Collaboration among the financial industry, academia, civil society, and others drives innovation, incorporating climate risks into risk management and finance strategies aligned with the Paris Agreement. This extends to stakeholders in non-bank sectors, including capital markets, pensions, and insurance, shaping approaches to climate risk management (SBFN/IFC, 2023[68]).
Thematic bond standards and frameworks: Green, social, sustainability, or sustainability-linked bond standards govern the issuance and management of these bonds, defining eligibility criteria for projects financed by them to ensure alignment with environmental, sustainable, or social goals. These standards can be issued nationally by sovereign entities or at the entity level, such as private companies or stock exchanges. They specify project types, reporting requirements, and verification processes to enhance transparency and credibility. Adhering to these standards helps investors identify environmentally sound opportunities and promotes a transparent thematic bond market. Additionally, public or private financial institutions may establish internal regulatory frameworks to determine eligible financial products for thematic bond issuance in the local market (SBFN/IFC, 2023[68]; OECD et al., 2022[67]).
Manuals for measuring climate expenditure in relation to the national budget: These documents or guidelines establish methods for evaluating public expenditure related to climate initiatives within a country's budget. They provide clear guidelines for identifying, classifying, and measuring spending on activities addressing climate change, such as renewable energy projects and adaptation measures. The aim is to enhance transparency and accountability in allocating financial resources for climate action at the national level. Given the absence of an internationally agreed methodology for identifying such expenditures, it is crucial to develop a harmonised conceptual framework and regional methodological guidelines that integrate with existing statistical systems (Pizarro et al., 2022[69]).
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← 1. Resolución de Gabinete No. 3 de enero de 2021 (ajuste hasta por B/.700 millones) y Resolución de Gabinete No. 54 de mayo de 2021 (ajuste hasta por B/.125 millones adicionales).
← 2. Authors’ calculations based on (INEC, 2022[14])Health spending takes into account spending by the Ministry of Health (MINSA) and Caja de Seguro Social (CSS) as a share of GDP (current prices).
← 3. Calculations on the basis of preceding year data included in Balance Fiscal del Gobierno Central y del Sector Público No Financiero for 2020, 2021 and 2022.
← 6. The UN system in LAC launched the first Common Framework of Sustainable Finance Taxonomies through the Working Group on Taxonomies of Sustainable Finance in Latin America and the Caribbean, which is comprised of: the UN Environment Programme (UNEP); the World Bank Group; the UN Development Programme (UNDP); the Economic Commission for Latin America and the Caribbean (ECLAC); the Inter‑American Development Bank (IDB); the Development Bank of Latin America (CAF); and the UN Food and Agriculture Organization (FAO).