Economy of Panama

The economy of Panama is based mainly on the tourism and services sector, which accounts for nearly 80% of its GDP and most of its foreign income. Services include banking, commerce, insurance, container ports, flagship registry, medical and health, and tourism. Historically, the Panama Canal (and the nearby ColÃ³n Free Trade Zone) was the key source of Panama's income, but its importance has been displaced by the services sector. The country's industry includes the manufacturing of aircraft spare parts, cement, drinks, adhesives, and textiles. Additionally, exports from Panama include bananas, shrimp, sugar, coffee, and clothing. Panama's economy is fully dollarized, with the US dollar being legal tender in the country. Panama was the first foreign country to adopt the U.S. dollar as its legal currency (1903) after its secession from Colombia (with U.S. help) temporarily deprived it of a local currency. Panama is a high-income economy with a history of low inflation.

Top Sectors in Panama

Banking and Finance in Panama

Panama has a substantial financial services sector and no central bank to act as a lender of last resort to rescue banks that get in trouble. As a result, Panamanian banks are very conservatively run, with an average capital adequacy ratio of 15.6% in 2012, nearly double the legal minimum. The sector grew up providing trade finance for trade passing through the Canal, and later evolved into money laundering for the drug trade under Noriega. Since the global financial crisis of 2007-08 the country has been trying to shake off its reputation as a tax haven, signing double taxation treaties with many (mostly OECD) countries and in April 2011 a treaty on the exchange of financial information with the United States.

Agriculture in Panama

Agriculture in Panama is an important sector of the Panamanian economy. Major agricultural products include bananas, cocoa beans, coffee, coconuts, timber, beef, chicken, shrimp, corn, potatoes, rice, soybeans, and sugar cane. In 2009 agriculture and fisheries made up 7.4% of Panama's GDP. Panama is a net food importer and the U.S. is its main supplier. Agriculture employs many Panamanians (in relation to agriculture's percentage of Panamanian GDP) because many farmers are engaged in subsistence farming.

Real estate in Panama

In spite of the economic and housing market growth, poverty is a problem in Panama. Most indigenous people live in extreme poverty while others located in rural areas live in basic poverty. Lack of sanitation, electricity, basic water, health, and education amongst the poor is a serious problem affecting Panamaâ€™s housing conditions. In an attempt to encourage foreign investments for real estate projects and infrastructure, the government of Panama enacted laws protecting foreigners and citizens who make investments.

Panama - Key Economic Indicators

Exports and Imports

Panama's economy heavily relies on its service sector, particularly in finance and tourism. The country exports goods such as bananas, coffee, shrimp, and sugar, while importing machinery, food products, and consumer goods. The balance of trade is influenced by fluctuations in commodity prices and demand for Panama's services.

Infrastructure

Panama has invested in developing modern infrastructure, including roads, bridges, ports, and airports. The Panama Canal is a vital transportation route, facilitating international trade. Infrastructure development supports economic growth and enhances Panama's connectivity with global markets.

Balance of Trade

Panama typically maintains a trade surplus due to its exports of goods and services, including maritime services through the Panama Canal. The balance of trade is crucial for sustaining economic stability and ensuring sufficient revenue generation for the country.

Fiscal Policy

Panama's fiscal policy involves government spending in sectors such as infrastructure, education, healthcare, and social welfare programs. Taxation policies aim to generate revenue for public services and investment. Specific tax rates and spending allocations may vary based on government priorities.

Monetary Policy

The Central Bank of Panama regulates the country's monetary policy to maintain price stability and support economic growth. Central bank actions include managing interest rates, controlling inflation, and safeguarding the stability of the Panamanian balboa currency.

Trade Agreements

Panama has various trade agreements, including those with countries in the Americas and Europe. It benefits from preferential trade access to markets through agreements like the United States-Panama Trade Promotion Agreement. These agreements facilitate trade relations and market access for Panama's exports.

Environmental Regulations

Panama has implemented environmental regulations to address pollution, conservation, and sustainable development. Efforts focus on protecting natural resources, biodiversity, and mitigating the environmental impact of economic activities such as canal operations and infrastructure projects. Compliance with environmental laws is essential for promoting sustainable growth and preserving Panama's ecosystems.

Tax System in Panama

Capital Gains Tax: Panama does not impose a capital gains tax on profits from investments for individuals. However, corporations may be subject to taxes on capital gains depending on the nature of the investment.
Corporate Tax Rate: The corporate tax rate in Panama is a flat rate of 25% on net taxable income for both resident and non-resident companies.
Sales Tax: Panama applies a value-added tax (VAT) system known as the ITBMS (Impuesto de Transferencia de Bienes Muebles y Servicios), which is set at a standard rate of 7%. Certain goods and services may be exempt or subject to reduced rates.
Property Tax: Property tax rates in Panama vary depending on the location and assessed value of the property. The rates typically range from 0.6% to 2.1% of the property's registered value.
Payroll Tax: Panama imposes a payroll tax on wages and salaries, which includes contributions to social security and other benefits. The tax rate is progressive, ranging from 0% to 9.75% based on the employee's income level.
Tax Deductions and Credits: Panama offers various tax deductions and credits to individuals and businesses to reduce their overall tax liability. These deductions and credits may include incentives for investments in certain sectors, research and development activities, and contributions to social programs.
Tax Compliance: The efficiency of tax collection in Panama refers to the government's ability to enforce tax laws and collect taxes owed by individuals and businesses. Efforts to improve tax compliance include measures to enhance transparency, strengthen enforcement mechanisms, and combat tax evasion and fraud.
Tax Burden: The tax burden in Panama varies depending on factors such as income levels, business activities, and types of taxes paid. Overall, the tax burden is moderate compared to other countries in the region, with total tax revenues accounting for around 15-20% of GDP.

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