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

The economy of Panama rebounded strongly from the deep downturn caused by the COVID-19 pandemic but faces new headwinds. In the 17 years prior to the pandemic, Panama’s gross domestic product (GDP) grew by 6.4% on average in real terms, sustained by unprecedented booms in construction and investment. The pandemic and subsequent lockdown led to GDP shrinking by 17.7% in 2020. Despite uncertainty in the global economy, Panama’s economy recovered quickly, however, growing by 15.8% in 2021, 10.8% in 2022 and 7.3% in 2023, overtaking 2019 real GDP. The economy slowed down in 2024, primarily due to the closure of the Cobre Panamá mine, fiscal challenges, and external pressures affecting key sectors, but still grew by 2.9%.

In contrast to the rapid economic rebound, the social consequences of the pandemic were sizeable and are likely to have long-lasting impacts. The unemployment rate increased from 7.1% in 2019 to 18.5% in 2020 and at 9.9% in 2022, remained above pre-pandemic levels. Informality rates also rose during 2020. Job and income losses during the pandemic and lockdown pushed up the poverty rate by 1 percentage point, to 15.6%, between 2019 and 2021. On the education front, Panama’s school closures – 55 weeks – were the longest in the region. Given the pre-existing differences in access to digital learning across socioeconomic groups, this raises concerns.

The policy response to the crisis was swift and strong, underpinning the economic recovery and mitigating the social impact of the crisis. The 2020 budget was maintained in nominal terms, but expenditure corresponding to 3% of GDP was redirected to fight the pandemic. The emergency social transfer programme, Panamá Solidario, had one of the broadest coverages in the Latin American region and was among the most long-lasting, having been extended to October 2023. The programme contributed substantially to limiting the increase in poverty.

The scale of the policy response had the effect of deteriorating the fiscal position of Panama, making it more vulnerable to future shocks, although the subsequent strong recovery improved fiscal space. The drop in revenues led to budget deficits of 10.2% in 2020 and 6.4% in 2021, and to a large increase in public debt, which reached 61.2% of GDP in 2020. Debt service as a percentage of tax revenues increased by 2.5 percentage points between 2016 and 2022, reaching 13.1%. In turn, the deterioration in debt ratios increased perceived risk and borrowing costs. Notably, the sovereign bond spread has risen to higher levels compared to before the COVID-19 crisis. Recovering tax and non-tax revenues rapidly brought the debt ratio down (to 58% in 2021), although it remains higher than pre-crisis (40.2% in 2019). Notably, Panama did not suspend its fiscal responsibility law but instead reformed it, committing to gradual fiscal consolidation to reach pre‑crisis deficit levels. The target was initially set for 2025, but in 2024, the law was amended to include a new stability path with the aim of gradually reducing the fiscal deficit to 1.5% by 2030.

Global macroeconomic instability and degraded fiscal ratios have created an uncertain environment. Inflation and volatility in fuel and food prices are of particular concern for Panama, a net importer of food and energy, which also relies heavily on activities that depend on global transport networks. Rapid monetary tightening can also exacerbate risks to the financial system.

While the crisis highlighted significant vulnerabilities in Panama’s development model, its response points to possible solutions. The dual nature of the labour market, segmented between more productive formal jobs and less productive informal jobs, and the limited reach of the social protection system were insufficient to cope with the social impact of the crisis. The emergency social assistance programme could, however, pave the way and catalyse pending reforms. With economic diversification remaining a key pending issue, policies implemented in support of the agricultural sector to ensure food security show how targeted support can help address regional inequalities in production and incomes. This report draws lessons from the policy measures implemented in response to COVID-19 and in the recovery phase to identify strategic priorities for today’s challenges.

To chart a more inclusive development path, Panama can further develop its social protection system and strive to overcome duality in the labour market and in regional development. The country can build on the experience of the emergency social assistance programme Panamá Solidario to reform durably its social protection system and make it more effective and complete. It can also develop active labour market policies based on the Nuevo Panamá Solidario programme. More broadly, it can encourage training and skills formation to overcome the split in the labour market between productive formal jobs and less productive, informal jobs. Digitalisation and the promotion of digital skills offer great potential in this respect. Finally, emergency programmes to sustain food production could be the basis for targeted support to the development of agrifood value chains in less developed regions.

To shape a stronger recovery, Panama should strive for more diversified growth while continuing to promote targeted tools for micro, small and medium-sized enterprises (MSME). A more inclusive and diversified growth path requires building on Panama’s assets and investing in the knowledge economy. To date, spending on research and development (R&D) has been volatile and relatively low. Greater linkages between the modern tradable service sector and other sectors could help trade and the activities linked to the Panama Canal boost economic dynamism in regions beyond the Panama-Colon axis. Actions to support MSMEs during the pandemic, including credit measures and reforms to the MSME authority, also have potential to reduce the duality in the economy and increase productivity. Digitalisation is an important tool in this respect and requires support to firms and further investment in communication infrastructure.

Beyond the gradual fiscal consolidation already in progress, a comprehensive fiscal reform agenda, based on a broad consensus, is necessary to increase revenues, fight tax evasion, rationalise costly preferential tax treatments and review the tax mix, including the limited role of environmental taxes. Only then can fiscal consolidation be achieved along with sustained public investment. Increasing the quality, effectiveness and efficiency of spending can help raise the well-being of Panamanian citizens. Finally, Panama is already carbon-neutral in net terms but can further mobilise sustainable financing, particularly given the context of tight fiscal space. The further development of sustainable debt market instruments, such as green, social, sustainable, and sustainability-linked (GSSS) bonds, is crucial for directing funds towards fostering a more sustainable and resilient economy. Enhanced regulation and oversight through consolidated sustainable finance frameworks is essential to ensure the effectiveness of these instruments and mitigate risks. These frameworks should be built on clear standards, regulations, and a comprehensive taxonomy, and it should be harmonised across countries.