A Multi‑dimensional Approach to the Post-COVID‑19 World for Panama

1. Overview: Policy priorities for an inclusive, strong and resilient recovery in Panama

Abstract

Panama’s economy rebounded strongly from the deep downturn caused by the COVID-19 pandemic, thanks to swift and strong policy responses to sustain the economic recovery and mitigate the social impact of the crisis. The social consequences of the crisis proved more durable, in particular in labour markets. The public policy responses to the pandemic and the recovery offer valuable lessons for responding to structural challenges in the country’s development. This chapter summarises the findings of this report and presents policy priorities for an inclusive, strong and resilient future development trajectory in Panama.

Panama experienced dramatic growth in the years prior to the COVID-19 pandemic. Real GDP growth averaged 6.4% between 2002 and 2019, sustained by a massive investment and construction boom that included the expansion of the Panama Canal and the construction of one of the largest copper mines in the world. This period of rapid growth led to a narrowing of the per-capita income gap with advanced economies and to the halving of the poverty headcount rate (measured at USD 3.10 in purchasing power parity [PPP]) from 20% to 8% between 2004 and 2014 (OECD, 2017[1]).

The economy of Panama was hit hard by the COVID-19 pandemic but rebounded strongly. Panama’s economy contracted by 17.7% in 2020 against the backdrop of COVID-induced lockdown measures and a global recession. Key drivers of growth suffered large falls in activity, including hospitality (-61.7%), construction (-47.6%), and manufacturing (-20.7%). Driven by strong performance in copper mining, construction, manufacturing and commerce, it grew 15.8% in 2021, 10.8% in 2022 and 7.3% in 2023, overtaking 2019 levels of GDP in 2022. The economy slowed down in 2024, driven by the Supreme Court’s 2023 decision to repeal the copper mine concession, along with fiscal challenges and external pressures affecting key sectors. Despite these challenges, the economy grew by a respectable 2.9% in 2024, above the estimated regional average of 2.2% (World Bank, 2025[2]).

Key social indicators, in contrast to the rapid economic rebound, have deteriorated more durably in Panama. The national unemployment rate rose sharply from 7% in 2019 to 18.5% in 2020; as of April 2022, it remained above pre-pandemic levels despite government measures to temporarily suspend contracts that were implemented from March 2020 to prevent layoffs. The economic impact, coupled with the lack of a universal social protection system, contributed to an increase poverty. The median labour market income decreased by around 20% between 2019 and 2020. According to national estimates, poverty rose from 21.5% in 2019 to 22.2% in 2022 before falling to 21.7% in 2023 (MEF, 2024[3]). Informality also increased, from 44.9% in August 2019 to 47.6% in October 2021, as job destruction was larger among formal than informal jobs.

The government’s swift emergency response helped contain the adverse socio-economic effects of the pandemic and subsequently sustain the recovery. The government’s Panamá Solidario programme helped keep poverty levels almost four percentage points lower than would have been experienced in the absence of such measures; by some estimates, poverty would have exceeded 18% without the programme (World Bank, 2022[4]). The fiscal response was also substantial. The government maintained the 2020 budget in nominal terms, reallocating USD 2 billion in expenditures to meet the increase in health expenditure. It also resorted to new debt to finance a budget deficit of 10.23% of GDP.

The fiscal effort has tightened fiscal space in the short run. The public sector fiscal deficit resulted in a large increase in public debt, which reached 61.9% of GDP in 2020. To allow for such a large deficit, Panama reformed its fiscal responsibility law in 2020, setting a path for gradual fiscal consolidation to attain pre-crisis levels of deficit (1.5%) by 2025. The deficit originally kept pace with the mandated path, reaching 6.45% of GDP in 2021, 3.98% of GDP in 2022, 3.93% of GDP in 2023. In 2024 the deficit surpassed 7% of GDP, but an amendment to the fiscal responsibility law established new limits for the fiscal deficit, aiming for 4% in 2025, with a gradual reduction to 1.5% by 2030. To promote credibility in fiscal policy and therefore reduce the cost of borrowing, the Ministry of Economy and Finance has reaffirmed the government’s commitment to financial discipline and responsible regulatory frameworks that ensure economic stability.

The COVID-19 crisis exposed several structural vulnerabilities in Panama’s model of development – as well as risks that could deepen existing inequalities. Given the size of the crisis and emergency measures that needed to be implemented, the social protection system proved inadequate. The failings of the social protection system can be traced, in part, to the dual nature of the economy. Informality persists in certain sectors in which low-skilled Panamanians tend to work informally, especially in non-tradable sectors. Meanwhile, key driving sectors (such as international commerce and the modern tradable services sectors) offer higher-wage, skilled jobs. Ample scope exists for economic diversification to sustain a growth path that is not only a stronger but also more resilient and generates wealth across the country, overcoming wide regional disparities. In the absence of a strong and inclusive recovery, increased poverty and vulnerability levels, coupled with the asymmetric impact of the pandemic shocks across socio-economic groups, risk to further deepen inequalities.

Panama has to face these challenges in a context of increased uncertainty. As a food and energy importer, the country is particularly sensitive to price increases deriving from Russia’s war of aggression against Ukraine. Moreover, rising transport costs and disruptions to global trade increase the level of uncertainty linked to Panama’s trade sector, as well as revenues generated by the Canal. Finally, although the financial sector weathered the crisis well, the rapid increase in global interest rates risks undermining portfolio quality in Panama’s banking sector, especially compounded against the relatively slow recovery of the labour market.

Identifying key megatrends and evaluating potential sources of uncertainty can help shape and prioritise policy actions for Panama. Unlike single events (shocks), identifying megatrends allows governments to prepare and establish development strategies and guide future policies in the medium term. These megatrends include demographic change, rapid urbanisation, rise of technology, and climate change and resource scarcity (Box 1.1). Horizon scanning exercises can help prepare for potential challenges or sources of uncertainty that may influence the country’s development strategy (Box 1.2).

Box 1.1. Panama in a changing world: Megatrends

• Demographic change. Panama is experiencing a slowdown in population growth that mirrors developed OECD economies. Annual population growth, which stood at 3% in 1961 and over subsequent decades, fell to 2% in 2000 and 1.5% in 2021 (World Bank, 2022[5]). With a share of 10.6% of the population over 60 years of age, Panama is, in demographic terms, a society in an advanced process of demographic ageing. In the medium term, this will pose challenges for service provision and financial stability. Coupled with higher life expectancy and declining birth rates, demographic ageing may put pressure on the financing of adequate pensions, health and long-term care. In particular, pension coverage in Panama remains far from universal (even though it is higher than the regional average of around 65%). Overall, around 46.9% of the population aged 65 or more receive a contributory pension, while another 32.5% receive a non-contributory pension, leaving a significant coverage gap of around 20%. The defined benefit programme of the Caja del Seguro Social (CSS) already faces sustainability issues. Setting the pension system on sustainable financial footing will be key to avoid depleting its reserves.

• Urbanisation trends. Panama has experienced rapid urbanisation. The real estate boom that started in the early 2000s and continued during the last decade has left Panama City experiencing extraordinary spatial growth. Its urban sprawl increased by 12 000 hectares between 2000 and 2010, while an additional 6 314 740 square metres of buildings have since been constructed in the Panama and San Miguelito districts (INEC, 2020[6]). This growth has been more than a process of physical or territorial expansion. It has led to multicentricity, fragmentation of public spaces and the dispersion of Panama City. In parallel, a complex process of urban and suburban development that lacked order has led to the creation of a new urban area. While lower than the regional average, the urban population in Panama increased from 41% of total population in 1961 to 69% in 2021 (World Bank, 2022[7]). This poses new challenges in terms of providing public services and urban planning, as well as territorial inequalities, given that most economic activities and highly paid, skilled jobs are concentrated in Panama City and Colón.

• Rise of technology. Technology is playing a major role and bringing far-reaching changes in people’s daily lives in communications, services, online trade and e-payment, among others (OECD, 2020[8]). As in OECD countries, the pandemic brought important advances in technological progress to Panama's economic and social structures, changing the way people and state relate to each other profoundly. From automation to artificial intelligence to ad-hoc technologies for teleworking, digital transformation has accelerated processes compared to the pre-pandemic period.

• Climate change and resource scarcity. Like many countries in Central America, Panama is in a situation of high vulnerability to climate change – even though it emits a relatively small share of green-house gases (GHG) and is carbon neutral. Already, Panama shows evidence of extreme weather events having negative impacts on sectors of national interest, such as water availability in summer; increased energy demand linked to high temperatures; loss of crops and soil; loss of coastline due to storm surges; and increased flooding in large urban centres, with damage to infrastructure and services (MIAMBIENTE, 2020[9]). These effects require urgent action and the mainstreaming of mitigation and adaptation practices throughout the policymaking process, at all sectors and levels of government. They also require closer co-operation with civil society, citizens, academia and the private sector.

Box 1.2. Anticipating trends and preparing for future challenges in Panama

As part of the process of developing this report, the OECD organised a horizon scanning workshop with local stakeholders and experts to identify potential challenges to inclusive, sustainable development in Panama. This workshop sought to ensure that recommendations in this report would not only address current challenges but also withstand shifts in the global economy. It also aimed to identify potential sources of uncertainty that may influence Panama’s development strategy towards 2030.

This workshop, entitled “Panama and its post-pandemic strategy: Vision and challenges”, was co‑hosted by the Ministry of Foreign Affairs in Panama City on 31 May 2022. Its 20 participants included government officials from diverse ministries and civil society representatives.

Several participants referred to the importance of the decarbonisation process and the energy transition in Panama, although development of many related aspects was perceived as more or less certain. Despite having low levels of emissions and capacity to absorb more GHG emissions than it emits, Panama will need to avoid having economic progress come at the expense of a larger carbon footprint while also reducing the impacts of climate change on the most vulnerable citizens. The 2020 update to its Nationally Determined Contribution (NDC) to the UN Framework Convention on Climate Change (UNFCCC) proposes reducing GHG emissions by 11.5% by 2030 (against a business-as-usual [BAU] scenario), with priority given to energy and forestry as they represent the most important national sources of GHG. Panama’s National Energy Plan 2015-2050 also establishes that 15% of its energy matrix should come from non-conventional renewable sources by 2030. Several steps have already been taken in this direction, including a clear effort (since 2013) to scale up renewables especially. While hydropower already represents 43.9% of installed capacity for electricity production, increased resistance of local communities to the construction of new dams may make this avenue more difficult. Most of Panama’s energy supply (82.3% in 2019) depends on imports of oil, coal and gas, exposing the country to the volatility of global energy prices. In the context of high oil and gas prices, further diversifying the energy matrix could bring benefits in terms of energy resilience. This will also depend on the fiscal and financial instruments put in place by the government.

Participants also referred to the potential opportunities and risks that reconfiguring logistics and global value chains could bring to Panama’s economy. The impacts of COVID-19, compounded by the Suez Canal 6-day obstruction in 2021 and the 2022 lockdown in Shanghai, have shown how vulnerable extended and complex value chains are and how they expose many firms to a lack of inputs and products, as well as an increase in prices. These difficulties may stimulate greater ring warehousing capacity or establishment of dry ports near demand centres to shorten the time to get goods to market (Twinn et al., 2020[10]). These are trends in which Panama may stand to win. Its well-developed logistics sector (with the Canal, the Copa Airlines airport hub and five ports), together with its strategic position, may help Panama consolidate itself as a regional distribution hub for the Americas. The CEO of Panamá Pacífico reported (in February 2022) that clients were already demanding larger warehouses and expanding their in-country footprint. In fact, both multinational and medium-sized companies were consolidating their logistics operations (LatAmInvestor, 2022[11]). Over the medium term, some firms may seek to shorten or diversify their value chains by relying on alternative partners (e.g. nearshoring) or by bringing strategic sectors ‘back home’ (e.g. reshoring). Nearshoring will especially benefit countries in which manufacturing capacity is already well-developed and can partially substitute for production in the People’s Republic of China (hereafter “China”) (Twinn et al., 2020[10]). In this respect, to attract multinational firms in the manufacturing sector and add value to cargo passing through the country, as part of Panama’s Economic Recovery Plan, the government introduced (in 2020) a new fiscal regime (Régimen Especial para el Establecimiento y Operación de Empresas Multinacionales relacionadas con la Manufactura [EMMA]) to favour the establishment of multinational firms with manufacturing operations in Panama. By August 2022, three companies had already invested in the country under this new regime (MICI, 2022[12]). Going forward, the success of this endeavour will depend on many factors, including continued investment in infrastructure, human talent, and research and innovation.

Among the most uncertain external events with medium-to-high impact on Panama, workshop participants identified rising inward migration flows due to political and economic instability in neighbouring countries. With socio-economic conditions in Panama improving, the international migrant stock has gradually increased, from 2.5% of the population in 1990 to 7.3% in 2020 (IOM GMDAC, 2021[13]). At the height of the COVID-19 crisis in 2021, the number of migrants taking the route to North America also increased. According to the National Migration Service of Panama, 48 430 people transited through the dangerous route of the Darien Jungle between January and June 2022, including 7 282 (15%) children and adolescents, up from 4 366 over the same period in 2021. Among more than 50 nationalities, 58% of migrants are from Venezuela, followed by Haiti (7.9%), Cuba (5.2%), Ecuador (3.3%) and Senegal (3.2%). In July 2022, road closures caused by national strikes led to the temporary suspension of the transit of migrants to the province of Chiriquí, at the border with Costa Rica. Given that Panamanian authorities have the capacity to screen and transport only 100 migrants to the Costa Rican border per day, this has caused overcrowding at the Migration Reception Stations (UNICEF, 2022[14]; Plewa, 2021[15]). Several groups of migrants, including families, decided to continue on foot to Panama City, abandoning the controlled migration flow co-ordinated by the State. Since May 2022, migration has increased to an average entry of 300 to 500 people per day (UNICEF, 2022[14]). Rising inflation in the region may cause migration flows to increase, adding complexity to the current economic situation. A review of Panama’s migrant reception infrastructure and of its migration may be necessary in the future.

Workshop participants also referred to the possibility of Panama being unable to service its external debt as unlikely but potentially having a high impact. Several factors that may negatively influence this include the duration of the war in Ukraine, with its impact on inflation; continued monetary tightening in the United States and its impact on financing rates; the intensity of future protests in Panama and the scope of potential concessions made by the government; and a failure of Panama’s fiscal consolidation path. The current structure of public debt in Panama does not, however, pose major risks.

Finally, participants also mentioned the possibility of changes in the political configuration of Panama, with the emergence of an independent party rated as having low certainty and a mild impact.

Several initiatives undertaken since 2020 have set the stage for new consensus on development policy in Panama. The Economic Recovery Plan (presented in July 2020) includes a series of short- and medium-term measures for economic recovery, focused mainly on attracting investment and promoting employment-generating activities. It has been complemented by an Economic Reactivation Plan (presented in April 2021) with proposals by major business associations, under the leadership of the National Council of the Private Enterprise (Consejo Nacional de la Empresa Privada, CoNEP). In November 2020, the government launched a participatory process for achieving national pacts on matters of health, social security, education, economy, security and basic services. Known as the Bicentennial Pact “Closing Gaps” (Pacto del Bicentenario “Cerrando Brechas”), this initiative has resulted in a final report including 187 national agreements achieved as part of a consultation process. In December 2021, a High-Level Commission was created to follow-up on the Bicentennial Pact Agreements. All three initiatives focus on setting out concrete steps forward, without necessarily recasting a global development strategy for Panama.

This report analyses the lessons learned from the impact of the COVID-19 pandemic in Panama as well as the response and recovery plans to highlight key areas for the country to adapt to the post-Covid world. The policy initiatives taken during the COVID-19 crisis can indicate the roads to follow to tackle some of the key challenges facing Panama. For example, whilst the crisis exposed gaps in the social protection system, the Panamá Solidario programme led to an unprecedented level of information sharing across institutions to identify beneficiaries quickly. It also innovated in the use of digital mechanisms to deliver benefits. Further refinements of the programme have included vocational training and hiring subsidies, paving the way for more structured active labour market policies. Similarly, the programme Panama Agro Solidario and the public purchases of food, whilst originally intended to alleviate food insecurity, offer lessons as to the potential of targeted programmes to sustain increases in production and of articulating social protection and economic inclusion programmes.

The analysis in the report is organised along three key dimensions of the post-Covid-19 recovery with the aim of making it inclusive, strong, and sustainable. It analyses in turn the inclusiveness of the recovery, including measures devoted to mitigate the social impacts of the pandemic and the subsequent crisis, the support provided to the business and productive sectors, and the sustainability of finance for development. Across dimensions, the OECD COVID-19 Recovery Dashboard supports comparative analysis between OECD countries and Panama (see Box 1.3).

The remainder of this report is organised as follows. The following three chapters focus on Social measures, vulnerabilities and equal opportunities (Chapter 2); Business dynamism (Chapter 3); and Financing for development (Chapter 4). Each chapter provides: i) a description of Panama’s response to COVID‑19, with the main policies adopted in light of existing programmes; ii) an account of recovery plans and how they fit into medium- to long-term development strategies, particularly the Strategic Government Plan 2019-2024 and the Plan Colmena; and iii) an identification of priority policy areas in view of ensuring a strong, resilient and sustainable post-COVID-19 recovery. These three sections also aim to stress policy innovations that arose during the crisis (ranging from agile means to quickly transfer economic support to families to forms of inter-institutional co-operation) as well as the structural issues on which the crisis shed light. Selected policy areas were identified for focused attention during the process of elaboration of this report and were the subject of international policy workshops, whose results are summarised in boxes in the relevant policy sections. The remainder of this chapter presents the key conclusions from Chapters 2, 3 and 4.

Box 1.3. The OECD Recovery Dashboard

The OECD Recovery Dashboard was built at the request of OECD Ministers to track national efforts to ‘build back better’. Its development was led by a taskforce composed of representatives of national statistical offices from OECD countries alongside representatives of several OECD substantive committees. The indicators were carefully reviewed and selected through a consensus-based process that consulted various ministries from across all OECD countries. The report, welcomed by ministers at the 2021 Meeting of the OECD Council at Ministerial Level, is available in the OECD website.

In line with the OECD’s multi-dimensional approach to measuring progress, the Dashboard features 20 outcome indicators across four dimensions that matter for people, the economy and the planet. In this spirit, the indicators are not aggregated or ranked according to their importance. Instead, they are presented in parallel to convey a comprehensive picture of how a given country is doing in the context of the recovery.

The dimensions of the Dashboard correspond to the key priorities that OECD Members agreed should characterise the COVID-19 recovery. Each dimension features five indicators to track progress:

• The Strong dimension assesses the impact of the pandemic on the economic prosperity of households and businesses and monitors immediate signals of the state of the health crisis and the revival of economic activity.

• The Inclusive dimension focuses on how the crisis has affected the income and jobs of the most vulnerable citizens, and whether efforts to build back better are ensuring that economies and societies create equal opportunities for all.

• The Green dimension focuses on progress towards achieving a people-centred green transition, consistent with the goals of the Paris Agreement and the 2030 Agenda.

• The Resilient dimension focuses on factors that can help countries to better withstand the impacts of the COVID‑19 crisis and prepare for future challenges.

Source: OECD Recovery Dashboard, https://www.oecd.org/coronavirus/en/recovery-dashboard.

Lessons learnt, opportunities and policy priorities for Panama in the post-COVID era

An inclusive recovery: Addressing vulnerabilities and fostering equal opportunities through social protection and quality public services

Given the large economic contraction it triggered, the pandemic had major impacts on livelihoods in Panama. Effects were particularly strong in the labour market, with the unemployment rate rising sharply to 18.5% in 2020 (from 7.1% in 2019) and a lengthy recovery to the pre-pandemic trend of low unemployment.

The emergency social assistance programme Panamá Solidario played a critical role in buffering the impact of the crisis on people’s lives. Aimed at workers whose jobs had been suspended or lost as a consequence of the pandemic, it consisted of a cash grant of USD 80 per month initially, later raised to USD 120, or about 10% of the average wage (USD 1 249 in 2020). Panamá Solidario stands out as one of the emergency programmes with the broadest coverage (31.3% of the population) implemented in Latin America during the pandemic. It is estimated that the programme helped contain the increase in poverty, which would have been four points larger without such measures. In practice, poverty in Panama increased by only 1.0 percentage point between 2019 and 2021, compared with an average of 1.9 points across Latin American countries.

Going forward, the social protection system could be made more effective and comprehensive; the reaction to the pandemic shows how that can be done. Due partly to low coverage and high leakages, regular (non-emergency) social assistance programmes in Panama have only a modest impact on poverty, reducing it by 3.3 percentage points compared to what it would be without such programmes. The need to rapidly identify beneficiaries and deliver aid in the implementation of Panamá Solidario led to important innovations in the shared use of information across institutions and in using digital means to deliver transfers. These can be applied to existing programmes to improve both targeting and management mechanisms. In particular, Panama could consider extending the coverage of household registries used for social programmes so they can be extended to additional beneficiaries in times of crisis.

Informality levels remain a key factor of vulnerability in Panama. Informal employment is linked with a dual economy in which many low-skilled Panamanians work as self-employed or are informally employed in small, low-productive, non-tradeable service or agricultural sectors. They are typically disconnected from the highly productive modern service sectors that drive the economy. Promoting better skills and more formal jobs requires an integrated package of socio-economic policies.

An evolution of Nuevo Panamá Solidario could also help establish more effective active labour market policies. By combining hiring subsidies, intermediation and training, such policies could help reverse the long-term upward trend in unemployment and promote formalisation and school-to-work transitions.

Food security concerns loom in times of high inflation. Even though inflation is lower in Panama than in the rest of the region,1 inflation is higher for the poor’s consumption baskets than for the general population. The country’s high reliance on food imports raises concerns that currently high inflation rates could hurt the poor particularly hard. Policies that Panama introduced during the pandemic can help improve structural determinants of food security. The pandemic response included programmes (Panama Agro Solidario) to support food production through public procurement, credit and input grants, and the inclusion of rural communities.

Finally, Panama’s experience of the pandemic has brought to bear the importance and potential of digitalisation. Digital technologies supported the extension of Panamá Solidario and allowed the continuation of education despite prolonged school closures. Pre-pandemic, levels of access to digital technology were strongly determined by socio-economic status, with a 63 percentage point gap in access to laptops among children in better off households (78%) compared to children in poorer households (15%). Ensuring equal access to technology is key to prevent digitalisation from deepening existing inequalities. Looking forward, it is necessary to ensure that digitalisation efforts do not focus solely on equipment and infrastructure, but also enhance digital skills.

A strong recovery: Supporting economic growth and business dynamics

Panama was among the countries in which GDP contraction due to the pandemic was most acute, with GDP falling by 17.7% in 2020. The impact is explained by the exposure of the economy to the shock, with commerce, construction, transport, and real estate accounting for 64% of GDP. Micro, small and medium-sized enterprises (MSMEs) were particularly vulnerable to the crisis. MSMEs represent around 72% of firms in the country; more than 75% of them suffered reduced sales, liquidity problems and stalled investments.

After an initial strong rebound, the economy needs to overcome new headwinds. The economy recovered strongly in the years after the COVID-19 pandemic, growing by 15.8% in 2021, 10.8% in 2022 and 7.3% in 2023. The recovery in growth was driven by copper mining, construction, manufacturing, and commerce. In 2023, the Cobre Panamá mine was closed on environmental grounds. The mine generated 3% of GDP in 2022-23. As a result, growth slowed down to 2.9%, which remains above the regional average. In addition, severe drought which affected the activity of the Panama Canal in 2023/24, and continued uncertainty on the dynamism of global trade pose specific challenges to the Panamanian economy going forward.

Continuing to promote targeted tools for MSMEs remains key in post-COVID recovery. In response to the pandemic, the government of Panama adopted fewer sector-specific support measures than other countries but provided strong support to the agricultural sector through the Panama Agro Solidario programme. To support the economy in the early stages of the pandemic, the government also mobilised credit measures worth 2.1% of GDP – a significant effort, if lower than the average for Latin America and the Caribbean (LAC) (3.8%). The response to the pandemic also accelerated reforms to the small business support environment, with the digitalisation of the business registry of the MSME authority (AMPYME) and the extension of the guarantee fund for small and medium enterprises (PROFIMYPE). Going forward, it is necessary to monitor and evaluate these efforts. Despite deep financial markets in Panama, access to finance remains difficult for micro and small enterprises. A large share of MSMEs, especially micro-enterprises, are either discouraged from borrowing, do not have access (65%) or face high interest rates (10.2%) compared to medium-sized firms.

Digital solutions offer an avenue for boosting productivity. E-commerce and digitalisation increased in Panama during the pandemic, with a four-fold increase in sellers on the digital platform Mercado libre and an extension of digital payments. Continued investment in infrastructure is important to ensure the digital transformation does not accentuate inequalities, especially between urban and rural areas. Indeed, Panama lags behind the region leaders in terms of fixed broadband access. Support for digitalisation of MSMEs (e.g. for the crafts sector) has been strengthened through inter-institutional public-private initiatives, and can be furthered in other key sectors (such as tourism).

As economic dynamism returns, striving for a more inclusive and diversified growth path requires building on Panama’s assets and investing in the knowledge economy. With the recovery of global trade, ensuring that commerce and Canal activities benefit regions beyond the sites of Canal ports can help achieve a more inclusive path. Strategies that promote greater linkages between the modern tradable service sector and other sectors (including agroindustry) can help spread value creation geographically. Investing in the knowledge economy is also important for diversification and competitiveness. Spending on R&D in Panama has been volatile and relatively low (0.18% in 2022, compared with 0.56% in LAC and 2.7% in the OECD). It is also largely government-driven. For Panama to move towards an economy that leverages Canal activities while also diversifying beyond them, investment is needed in innovation capacity in enterprises and the economy, as well as in skills.

A resilient recovery: Sustainable financing for development

Panama was able to mobilise significant financial resources to face the COVID-19 pandemic. The government maintained the 2020 budget in nominal terms, reassigning resources equivalent to 3% of GDP to cover COVID-19 spending. Spending on health increased by 1% of GDP to 11.6% in 2020. Given the depth of the economic downturn, this resulted in a significant increase in the fiscal deficit, which reached 10.2% in 2020 and 6.7% in 2021, financed through a mix of external and internal debt. General government debt increased from 40.2% in 2019 to 61.9% in 2020.

The country is still resorbing the fiscal impact of the economic shock. Unlike countries that suspended their fiscal responsibility frameworks, Panama reformed its Fiscal Responsibility Law to set a fiscal consolidation path, allowing a deficit of 10.23% of GDP in 2020. The reform originally aimed for a gradual return to deficit of 1.5% of GDP in 2025. The protracted crisis necessitated budgetary restraint in 2021, with USD 825 million being devoted to COVID-19 spending. Capital expenditures, meanwhile, fell by 6.8% in 2021 to finance the increase in (mostly current) expenditure in 2020 and 2021 due to the pandemic. This achieved a deficit of 6.45% in 2021, and kept it in line with the fiscal consolidation path until 2023. However, in 2024 the deficit surpassed 7% of GDP. In the face of adverse economic and fiscal performance in 2024, the Fiscal Responsibility Law was amended in 2024, establishing new limits for the fiscal deficit from 2025 onwards, aiming for 4% in 2025, with a gradual reduction to 1.5% by 2030. Although the economic recovery lowered the debt ratio (to 58% of GDP at the end of 2021 and to 52.4% of GDP at the end of 2023), the crisis has deteriorated the already high debt-to-tax ratio and left Panama in a weaker fiscal position to face future shocks.

Panama’s financial sector weathered the pandemic well. As a response to the crisis, a moratorium was enacted, allowing for delayed repayment of bank loans without affecting delinquency rates. Expiration of the moratorium had only modest impacts on the quality of the loan portfolio. Risks remain, however, in the exposure of the portfolio to real estate (after the construction boom that fuelled growth in the past decade) and in the sharp increases interest rates in the United States. Although abundant liquidity may delay the passthrough of these rates to the local banking sector, further prudential management may be warranted.

A comprehensive fiscal agenda based on a broad consensus is necessary for the post-COVID consolidation path as set out by the Fiscal Responsibility Law. To ensure the necessary levels of public investment, several fiscal measures should be put in place. These include a stronger fight against tax evasion and avoidance, in particular by continuing efforts to improve collection of value-added tax (VAT). Non-compliance in VAT is estimated to cost Panama 2.2% of GDP. Other measures include broadening the tax base, and reassessing exemptions and preferential tax treatments (which amounted to 3.09% of GDP in 2019). Finally, a shift in the composition of tax revenues, and, in particular, increasing environmental taxes to raise revenue and incentivise a greener economy, holds great potential to increase revenues equitably and sustainably. Taxes to energy represented 0.24% of GDP in Panama in 2020, compared with 1.37% in the OECD area.

In line with government programme priorities, increasing the quality, effectiveness and efficiency of spending can help raise the well-being of Panamanian citizens. The share of Panamanians satisfied with healthcare (49%) and education (58%) has been on a downward trend. Expenditure on social protection and education has increased in the past decade, as has expenditure on health, boosted also by expenditure during the pandemic. Social expenditure levels, however, remain below the LAC average. Key issues in the composition of public expenditure will be the need to contain both current expenditure (which increased notably with social assistance programmes implemented during the pandemic) and the public sector wage bill (which had increased steadily even before the pandemic from 3.9% of GDP in 2013 to 4.8% in 2019, then to 6.6% in 2020).

Sound debt management can help Panama finance the next stage of its economic development. While the debt ratio increased during the pandemic, Panama maintained good access to markets, and managed to extend the average maturity of its debt portfolio (to 13.8 years in 2022) while lowering its weighted cost (to 3.89% in 2021). As Panama issues largely in USD and under foreign law, it has maintained good borrowing conditions in the midst of increasing global interest rates. However, the cost of borrowing has increased since the end of the crisis, following an increase in perceived country risk, and the weighted cost of the debt portfolio was 5.27% at the end of 2024. The cost of debt service has also increased, reaching 13.1% in 2022, above the average for the LAC region (12.2%). Commitment to financial and fiscal discipline will help ensure economic stability and contain financing costs.

Finally, Panama is already carbon neutral, but can do more to mobilise sustainable financing and finance a greener economy. The recent update of its GHG emission inventory for the period 1994-2017 found that Panama had already reached its carbon neutrality objective (set for 2050). The country has also been taking steps to reach other targets set out in its NDC, including developing manuals to identify climate change expenditures in the national budget and establishing the foundations for carbon compensation and a carbon market to operate for domestic and international carbon credit transactions.

Given the tight fiscal space, it is necessary to use innovative sustainable debt market instruments to channel funds to finance a greener and more resilient economy. As of 2023, Panama's green bond market was valued at USD 379 million with three issuers, and the social bond market was worth USD 50 million with one issuer. These figures are below the potential of the Panamanian market and the levels achieved by regional leaders. Moving forward, the adoption of innovative approaches to other thematic bonds, such as Sustainability-Linked Bonds (SLBs), can offer Panama the opportunity to fulfil its commitments under the Nationally Determined Contributions (NDCs), whilst also aiding in the promotion of the long-term sustainability of its sovereign debt. Further efforts should also be directed towards expanding, enhancing and harmonising its sustainable finance framework. This is essential to ensure greater market transparency and to enhance the attractiveness of its capital market. The publication of the national sustainable taxonomy in March 2024 is a crucial step forward in continuing to broaden and enhance transparency and trustworthiness within the sustainable debt market.

References

[6] INEC (2020), Censo de Construcción de Edificaciones, Instituto Nacional de Estadística y Censo, Panamá, https://www.inec.gob.pa/.

[13] IOM GMDAC (2021), Migration Data Portal: The bigger picture, International Organization for Migration, Berlin, https://www.migrationdataportal.org.

[11] LatAmInvestor (2022), Panama Strives to Add Value, LatAm INVESTOR Ltd, Kemp House, https://latam-investor.com/2022/02/panama-strives-to-add-value/.

[3] MEF (2024), Pobreza y distribución del ingreso de los hogares: Encuesta de Hogares Años 2022 y 2023, Ministerio de Economia y Finanzas de Panamá, Panama, https://www.mef.gob.pa/wp-content/uploads/2024/10/Pobreza-y-distribucion-del-ingreso-de-los-hogares-Anos-2022-y-2023.pdf.

[9] MIAMBIENTE (2020), Impacto del Cambio Climatico en Panama, Ministerio de Ambiente de Panamá, https://cdn1.miambiente.gob.pa/wp-content/uploads/2020/11/3.TERCERA-COMUNICACION-NACIONAL.pdf.

[12] MICI (2022), Empresa suiza invierte en Panamá a través del régimen EMMA, Ministerio de Comercio e Industrias, Panama, https://mici.gob.pa/2022/08/01/empresa-suiza-invierte-en-panama-a-traves-del-regimen-emma/.

[8] OECD (2020), OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris, https://www.oecd.org/coronavirus/policy-responses/leveraging-digital-trade-to-fight-the-consequences-of-covid-19-f712f404/.

[1] OECD (2017), Multi-dimensional Review of Panama: Volume 1: Initial Assessment, OECD Development Pathways, OECD Publishing, Paris, https://doi.org/10.1787/9789264278547-en.

[15] Plewa, P. (2021), Migration Trends through Panama’s Darien Gap and What They Mean for Regional Cooperation, Centre for International and Global Studies, Duke University, Durham, NC, https://igs.duke.edu/news/migration-trends-through-panamas-darien-gap-and-what-they-mean-regional-cooperation.

[10] Twinn, L. et al. (2020), The Impact of COVID-19 on Logistics, International Finance Corporation, World Bank Group, Washington, DC, http://www.ifc.org/wps/wcm/connect/2d6ec419-41df-46c9-8b7b-96384cd36ab3/IFC-Covid19-Logistics-final_web.pdf?MOD=AJPERES&CVID=naqOED5.

[14] UNICEF (2022), Panama: Situation Report, July 2022, UN Children’s Fund, http://www.unicef.org/documents/panama-humanitarian-situation-report-20-july-2022.

[2] World Bank (2025), Global Economic Prospects - Latin America and the Caribbean - January 2025, The World Bank, https://thedocs.worldbank.org/en/doc/c50bc3c87bc2666b9e5fa6699b0b2849-0050012025/related/GEP-Jan-2025-Regional-Highlights-LAC.pdf.

[5] World Bank (2022), “Crecimiento de la población (% anual)”, Databank, The World Bank, Washington, DC, https://datos.bancomundial.org/indicador/sp.pop.grow?locations=PA.

[4] World Bank (2022), Latin America and the Caribbean, Macro Poverty Outlook: Country-by-country analysis and projections for the developing world, April 2022, International Bank for Reconstruction and Development / The World Bank, Washington, DC, http://www.worldbank.org/en/publication/macro-poverty-outlook.

[7] World Bank (2022), Urban population (% of total population), The World Bank Group, https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=PA-ZJ-OE-CO-CR.

Note

← 1.  The level of general inflation in Panama is low compared to the rest of the region, in particular due to the economy being officially dollarised.