Panama’s Economy

Panama’s Economy

Panama’s economy is growing each year and most of that is a result of a large increase in tourism, construction and the expansion of the Panama Canal.

The country’s key geographic location means that its wealth mainly stems from a well developed services sector which includes the Panama Canal, banking, the Colon Free Zone and tourism.  The services sector accounts for nearly 77% of the country’s GDP, which has the highest growth per capita in Central America.

Foreign investors are becoming increasingly interested in Panama and that has had a positive effect on the overall economy.  But Panama’s economy has always had an excellent reputation for stability.  After all, it is the banking centre of Central America, where all major financial institutions around the world have come to establish themselves in the region.

Nonetheless over the years, Panamanians have been plagued by a high unemployment rate, despite having a well-educated population.  In 2004, the unemployment rate was estimated to be just over 11%.  However, recent indicators have shown that many Panamanians are seeking to be trained with service skills and that the unemployment rate has steadily decreased to 9.8% in 2005, according to the CIA World Fact Book report.

Panama’s government took an active role in improving life for its people after a study done by the World Bank concluded that strict labor code relating to job security did not improve employment opportunities.  Before this study, employers could only dismiss their employees during the first two years on the job, and that was extended to five years following the conclusion of the study.  Overall, changes to the labour code were meant to put Panama’s industry at a level where it could compete internationally while creating more job opportunities.

Every year the situation improves.  Foreign investors are flocking to Panama because the US dollar is the currency of choice in the country.  Panama does not produce its own paper money, but it instead uses the US dollar, which has a 1:1 exchange rate to their national currency the Balboa.  Using the American dollar has made it easy for tourists to come and enjoy the fantastic shopping Panama offers.  The Free Zone, the largest in the western hemisphere and the second largest in the world after Hong Kong, has enjoyed enormous success and now accounts for 10 per cent of the GNP.

Economic forecasters continue to predict success for the country.  In 2004, Panama’s economy expanded by 4.5%, in 2005 by 6.4% and a projected 7.9% for 2006.  Increases in tourism, construction (stimulated by attractive tax incentives) and international banking have contributed to this growth.  Although the past 2 years have seen high increases in oil prices, inflation has remained low as it has been traditionally in Panama for the past 40 years.

After reaching free trade agreements with Taiwan and El Salvador, Panama is now pursuing negotiations with the US, Costa Rica and Nicaragua, and negotiations with the US are at an advanced stage.  On October 22, 2006, an approximate 77% of Panamanian voters approved the expansion of the canal during a nation wide referendum.  This USD$5.25 billion project is aimed at doubling the capacity of the canal and attracting an incredible 40,000 jobs during the estimated timeline of seven to eight years.