Chapter 5. Towards better institutions and sustainable development in Panama

To consolidate the high economic performance registered in the past decade and promote further inclusive development, better institutions and sustainable development are needed. This chapter first describes civic engagement and citizens’ trust in institutions. Second, it presents key aspects of public governance including the framework to plan, prioritise and implement policies in Panama. Third, it studies factors linked to medium- and long-term financial governance. Fourth, it focuses on the implementation of international transparency and exchange of information standards. Fifth, this chapter analyses policies towards further entrepreneurship and competition and better public-private partnerships. Sixth, it highlights the environmental sustainability in Panama, and finally it presents the main conclusions.


To build confidence in institutions at both national and international levels, and to guarantee the sustainability of the economy, a series of public policies enhancing the regulatory and institutional frameworks are needed. These policies include different areas in the public administration and some of these policies have an impact on private involvement in the economy.

This chapter discusses six key dimensions needed to improve the institutions and enhance sustainable development in Panama. First, it presents citizens’ perceptions regarding institutions and their civic engagement. It also presents recent efforts to increase transparency in Panama. Second, this chapter highlights the need to improve capacity of public institutions to better prioritise, implement and evaluate public policies. Third, it focuses on key areas affecting long-term financial sustainability, and in particular the fiscal and pension sustainability frameworks and the role of lender of last resort in case of deposits run. Fourth, this chapter presents the recent efforts achieved on international transparency and exchange of information standards and the Panamanian commitments to implement them. Fifth, it analyses the regulatory framework for entrepreneurship and private involvement in infrastructure. In particular it shows that while Panama ranks relatively well in some regulatory areas promoting entrepreneurship and competition, improvements in public-private partnerships are needed to enhance private involvement in Panama’s agenda for development. Finally, it analyses the environmental sustainability in Panama to promote green growth.

Civic engagement and confidence in institutions

The relationship between a government and its citizens provides the foundation for effective and democratic governance. While the state bears the ultimate responsibility for the provision of public goods and the rule of law, engaged citizens can support these efforts and help to create the conditions that produce, recognise and reward good governance (Woolcock and Narayan, 2006). Civic and political engagements as well as people’s perceptions of government effectiveness and integrity are therefore important aspects to consider when looking at the quality and legitimacy of governance in a country.

Developing the effectiveness and trustworthiness of the state can combine with efficient tax mobilisation to contribute to the effectiveness of state capacity and enable expanded provision of developmental goods and services, while minimising the compliance and enforcement costs for taxpayers (Kiser and Levi, 2015) (see Chapter 4 for a discussion of taxes).

Political participation is relatively high in Panama

Compared with its peers, political participation is relatively high in Panama. Political participation can take a number of forms and includes “all voluntary activities by individual citizens intended to influence either directly or indirectly political choices at various levels of the political system” (Kaase and Marsh, 1979). Participation in elections is the most powerful form of political engagement; while citizens cannot directly influence political decisions, voting serves as a key mechanism of political representation and accountability. Although differences across countries in institutional features of the voting systems might affect cross-country comparisons, Panama stands in the upper half of benchmark economies regarding voter turnout (Figure 5.1, Panel A). With a 77% participation rate during the last presidential elections, electoral turnout in Panama is 15 percentage points above the OECD average and 10 points above the average of Latin American countries. A focus on countries with similar voting systems (i.e. voting is compulsory but without sanctions imposed), such as Costa Rica and Dominican Republic, shows that Panama exhibits a higher participation (Maldonado, 2015). Though the difference is less impressive, voter turnout at parliamentary elections in Panama is still about 7 points above OECD and Latin American averages, and remains higher than in Costa Rica and Dominican Republic.

Figure 5.1. Civic engagement in Panama in comparison to benchmark economies

Note: LAC refers to the average of Latin American and the Caribbean countries. Panel A: For parliamentary elections, data refer to 2016 for Korea, Dominican Republic, Peru and Australia; 2015 for Portugal, Trinidad and Tobago, Argentina, Singapore, Colombia, Costa Rica, Panama, New Zealand, Belgium and Uruguay; 2013 for Chile and 2012 for Netherlands. For presidential elections, data refer to 2016 for Dominican Republic, Peru and Portugal; 2015 for Argentina; 2014 for Colombia, Costa Rica, Panama and Uruguay; 2013 for Chile; 2012 for Korea; and 2011 for Singapore. Panel B: Data for Trinidad and Tobago refer to 2013.

Source: Panel A: International Institute for Democracy and Electoral Assistance (IDEA). Panel B: Gallup (2016), Gallup World Poll.

While voting is the most popular and institutional means through which individuals “control” the appointment of government officials, there are certainly other ways that allow individuals to influence government officials, their political choices and the political system (Boarini and Díaz, 2015). Citizens can express their political voices by signing a petition, joining a political organisation or participating in a political rally or demonstration, among others. These activities are important instrumentally, as they can provide a corrective to public policy by revealing people’s needs, maintain political vigilance among citizens, and improve the quality of a democracy (OECD, 2011). An important indicator of the propensity of people to engage in political activities other than voting is the share of the population that voiced their opinion to a public official. With almost 35% of Panamanians reporting having voiced their opinion to a public official, Panama ranks first in the group of benchmark economies (Figure 5.1, Panel B).

However, confidence in institutions remains low

High levels of voter turnout are usually associated with high levels of trust in institutions and satisfaction with the functioning of democracy (Grönlund and Setälä, 2007; Stockemer, LaMontagne and Scruggs, 2013). However, a different situation can be seen in Panama, where the overall high level of political engagement persists despite low levels of confidence in governance institutions. Although trust in institutions or corruption are not variables that can be easily measured directly, these dimensions of governance are usually assessed through measures of perception among citizens or experts.

Perceived quality of government is remarkably low. Only 44% of respondents to Gallup World Poll (Gallup, 2016) believe in the honesty of elections and just 39% have confidence in national government (Figure 5.2, Panels A and B). Panama stands therefore slightly above what is usually observed in the region for both indicators, but behind what is reported on average in benchmark and OECD economies. These low levels are a long-standing phenomenon in Panama, with similar results observed in 2006 and 2016. This contrasts with trends seen in many benchmark economies where surveys of public confidence in the honesty of elections and in national government have shown sharp reductions over the same period.

Figure 5.2. Confidence in governance institutions

Note: Figures for 2006 refer to 2005 for Australia, Belgium and Netherlands.

Source: Gallup (2016), Gallup World Poll.

An improvement in trust in government is a key condition to boost inclusive development in Panama. The global economic crisis undermined trust in governments in most OECD countries but also in many Latin American ones. As one of the few countries that seems to have been spared this diminishing trend, Panama is better positioned to take measures that can build trust and confidence. This is a key challenge as trust in government is a necessary condition for governments to successfully carry out public sector reforms that will enhance incentives for entrepreneurship (see section below), job creation (see Chapters 2 and 3) and well-being of individuals (see Chapter 1).

Preliminary evidence shows that trust in government is negatively correlated with perceived levels of corruption in government (OECD, 2015a). Misuse of public resources and inadequate behaviour by government representatives shape public opinion on the overall trustworthiness of government. Defined as a distorting factor affecting the quality, composition and productivity of physical capital and undermining the benefits of investment, corruption can also be perceived as a cost to entrepreneurs and to citizens in general. Indeed, by creating a negative business climate for the private sector, corruption can affect public investment policies and challenge private investment. More generally, institutions that are perceived as ineffective in achieving their goals, non-transparent in how they act and unaccountable for their results undermine social cohesion, hamper collective action to achieve shared objectives, and reduce the well-being of individuals and communities.

Regarding corruption, Panama is in the bottom-performing third of the group of benchmark economies. Transparency International’s Corruption Perceptions Index (CPI) (Transparency International, 2016), ranks countries based on how corrupt their public sector is perceived to be by business people and country analysts and on a scale of 0 (highly corrupt) to 100 (very clean). By this measure, Panama ranks just at the midline for countries where data are available (87 out of 176 countries or territories). With a score of 38, Panama stands slightly above its Latin American peers (with scores ranging from 31 for Dominican Republic to 37 for Colombia), with the exception of Costa Rica and Chile (20 and 28 points ahead, respectively). The rest of the benchmark economies all score significantly above Panama (Figure 5.3).

Figure 5.3. Corruption Perceptions Index in Panama versus benchmark economies

Note: The Corruption Perceptions Index aggregates data from a number of different sources that provide perceptions of business people and country experts of the level of corruption in the public sector. The 2016 Index is constructed from 13 data sources.

Source: Transparency International, 2016.

The CPI is a measure based on expert perceptions, but measures of citizens’ perceptions also show that corruption is perceived to be widespread in Panama. Almost 80% of Panamanians state that corruption is widespread in government (Gallup, 2016). This negative perception on corruption is considerably higher than in OECD, Latin American and benchmark economies on average (Figure 5.4). People’s perceptions about government integrity and efficacy can also give a strong indication of the actual functioning of state institutions. Furthermore, as empirical work confirms, whatever the objective characteristics of a country’s political and social system, subjective evaluations of corruption do themselves appear to influence investment decisions, growth and the political behaviour of citizens (Mauro, 1995).

Figure 5.4. Is corruption widespread through the government? (percentage)

Note: The response scale for this question is binary and offers a yes or no option to the survey respondents.

Source: Gallup (2016), Gallup World Poll.

In recent years, Panama has approved several policies to enhance public administration and reduce corruption. In particular, in 2013 Panama created the National Authority of Transparency and Access to Information (ANTAI) (Autoridad Nacional de Transparencia y Acceso a la Información) to promote transparency in public management and strengthen the prevention of corruption. In November 2016, 111 public entities including state-owned enterprises and municipalities were evaluated by ANTAI on the transparency of their websites. Although 36 public institutions fulfil the transparency requirements in their websites, still 60 public institutions only partially comply with these requirements and 15 institutions are not providing public information to citizens. Panama also ratified the Convention on Mutual Administrative Assistance in Tax Matters on March 2017 (see section below). However, despite progress, most of these reforms are rather recent. The path that Panama is following is promising and further efforts should be made in that direction.

Improving planning and implementation frameworks to boost inclusive development in Panama

Implementing policies that tackle barriers to greater productivity and inclusiveness requires a better institutional framework for the strategic development agenda. The role of the centre of government (CoG) can be strengthened by increasing leadership, co-ordination and long-term implementation of that agenda. The prioritisation and planning of policies need higher capacity and better matching with public investment and other implementation policies. To increase the capacity of sub-national authorities in the design and implementation of their provinces, there is a need to increase co-ordination with the national government and build capacity of these authorities.

Towards better co-ordination of public policies

In all countries, the CoG should play a key role in ensuring the quality, co-ordination and monitoring of public policies at the executive level. The CoG is the body or group of bodies that provides direct advice to the head of the government and ministers. More precisely, it supports quality decision making by the head of government, and provides cross-government policy co-ordination and monitoring of the government policy implementation. Apart from their traditional role of serving the executive from an administrative perspective, CoGs are now playing a more active role in policy development and co-ordination across OECD countries. The extended definition of the CoG does not only include the presidency or its equivalent, but also comprises key strategic partners such as the ministry of finance or the ministry of planning. Depending on a country’s particular institutional makeup, several actors can play an important role in CoG co-ordination. Additionally, central agencies responsible for coherent human resources policies, e-government policies and regulatory policies across different departments can also contribute to reinforcing cross-government co-ordination.1

Similar to other Latin American economies, Panama lags behind most of the benchmark economies in the co-ordination of public policies in particular. Despite efforts to increase dialogue among different institutions in recent years, the lack of collaboration and co-ordination among ministries and within the administration is an obstacle to effective policy making and implementation. On a scale of 0 (very little co-ordination) to 4 (strong co-ordination), perception of co-ordination and collaboration between ministries and with the administration in Panama scores 2 (CEPII, 2012) (Figure 5.5.). This is below OECD member countries and slightly below Latin American economies. This poor performance can be explained by a number of factors such as weak capacity in the prioritisation and implementation for policies involving several ministries.

Figure 5.5. Perceptions of co-ordination among public institutions, 2012

Note: 0 represents very little co-ordination and 4 strong co-ordination. The Institutional Profiles Database provides an original measure of countries’ institutional characteristics through composite indicators built from perception data. The perception data were gathered through a survey completed by country/regional Economic Services (Services économiques) of the French Ministry for the Economy and Finance and the offices of the Agence Française de Développement.

Source: CEPII (2012), Institutional Profiles Database, Paris,

Finally, in spite of recent efforts there is little regional decentralisation of government planning and programming, while regional initiatives are not co-ordinated with the central government. Panama lags behind benchmark economies in the co-ordination of public policies. Panama is a centralised country where the government can improve the co-ordination of public policies among ministries and among regions to effective policy making and implementation. This has been highlighted as a concern by participants at the workshop realised in the context of this review and presented in Chapter 1 (Box 5.1). To tackle this challenge, a decentralisation law was approved in 2015 (Law 66 of 2015) to transfer responsibilities and resources from the central government to municipal authorities. This law has also created opportunities for effective citizens’ involvement in public management at local level.

Box 5.1. Views from the participatory workshop on the effectiveness of public policies

After developing stories depicting a desired future for citizens in Panama, and working on the different dimensions of the OECD’s How’s Life? framework, participants at the workshop (described in Chapter 1) discussed the different challenges in reaching development objectives. The most frequently cited challenge was political interference in public policy planning, and the issue of improvisation of public policies. Participants discussed challenges linked to an insufficient evidence base driving public policies and the limited capacity to carry out studies to drive public policies. They also discussed gaps in terms of policy planning and implementation, which they explained in terms of limited capacity and lack of a culture of systematic public policy evaluation, as well as difficulties linked to co-ordination of different institutions.

Improvements regarding planning and implementation of policies are needed

Panama is improving its governmental practices and institutional framework to achieve efficiency and transparency in public management. In this regard, the Law 34 on Social Responsibility of 2008 is a valuable tool to control the public deficit while advancing, in a transparent manner, the needed public policies. Such measures to improve monitoring and accountability are vital to overcome Panama’s problems of corruption, lack of trust in public institutions and undue influence that represent obstacles to inclusive and sustainable growth. However, the institutional framework still shows problems in its implementation, transparency and monitoring, and with heterogeneous capacities to plan and execute public policies across ministries. Finally, plans have remained limited to medium-term horizons (five-year plans) without links to long-term strategic plans. In that context, current efforts to move towards a strategic plan with a 2030 horizon are welcome (CCND, 2016).

The Social and Fiscal Responsibility Law is a key stepping stone to improve public management, demanding the articulation of strategic government plans with investments plans and the consideration of the multi-annual fiscal projections. Law 34 of 2008 on Social Responsibility requires incoming administrations to develop a five-year government programme during their first six months in office, in agreement with the Consejo de la Concertación Nacional para el Desarrollo (CCND) and campaign promises. These plans must include a social and economic strategy and the financing and investment plan necessary to advance the targeted sectors and programmes. The Ministry of Economy and Finances (MEF) then evaluates compliance with the planned budgets on a quarterly and yearly basis. This practice is a fundamental step to provide effective policy making and maintain a stable government deficit. The latest plan is the Strategic Government Plan - Plan Estratégico de Gobierno 2015-2019 (GRP, 2014).

But these plans fail to aim for a long-term strategic foresight to improve evidenced-based decision making. Strategic foresight refers to a long-term period (exceeding ten years) including planning scenarios. National development plans last only one five-year term and do not correspond in a unified longer-term investment strategy. Likewise, although every year the indicative plan of public investment is updated, capital budgeting only accounts for a five-year term of investments, which is not long enough for large capital investments. All of the current areas of the plan – social strategy, economic strategy, investment plan and financial programming – require short, medium and long-term planning, especially if Panama is to become a worldwide logistics and trade services hub. The requirement for a five-year government plan can serve as a foundation to develop a more comprehensive long-term strategy. Recent efforts are in the right direction. In co-operation with the Inter-American Development Bank, the government is working on the adoption of a 2030 National Logistics Strategy. In addition, regarding the energy sector, there is already a National Energy Plan with a 2050 horizon.

The regulatory framework foresees the development of specific plans by the sectorial authorities. An illustrative example of such plans is the Política Nacional de Ciencia, Innovación y Tecnología 2015-2019 by the National Secretariat of Science, Technology and Innovation (SENACYT). This plan develops both a medium-term and long-term (until 2040) strategy for the advancement of science, technology, research and innovation in Panama. It follows the guidelines contained in the 2015-19 Plan Estratégico de Gobierno, and also resulted from the dialogue among five inter-sectorial boards, SENACYT and international specialists that aimed to establish policy objectives and the programmes necessary to achieve them. The plan also provides a set of indicators to measure progress as well as the corresponding baseline values for 2009. Other examples of sectorial plans include the Plan Estratégico Quinquenal 2015-19 (Ministerio de Desarrollo Social); Plan Estratégico 2014-2019 (Caja de Seguro Social); Plan Estratégico de la Dirección de Recursos Humanos del Ministerio Público 2015-2025; and Plan Nacional de Logística.

However, there are mixed capacities among the different government institutions in the programming and the implementation of these plans, with some ministries achieving proposed goals while others lag behind. To increase the effectiveness of public policies to reduce inequalities and boost productivity, the government has to build capacities within its institutions and take ownership of strategic plans. The centre of government in Panama faces challenges related to leadership, co-ordination and capacity to design the government’s strategic plan. For instance, following the implementation of the Social Fiscal Responsibility Law, for the second time Panama is developing a country strategy plan along with a financing and investment plan. Although Panamanian authorities have the objective to increase technical capacity to produce internally such plan in the future, currently the administrations have delegated the responsibility of designing such plan to private consulting firms.

Strengthening technical capabilities within the ministries can ameliorate planning and evaluation difficulties. For this purpose, further in-work training is important. At the same time, a more stringent and transparent admission process will contribute towards the professionalisation of public servants (GRP, 2014).

Panama also needs to continue improving evidence-based decision making and information availability to better monitor the results of public policies. The adoption of programme-based budgeting is a step forward by the present administration to improve monitoring and transparency of public funds. Tracking programmes allows for closely monitoring the use of funds, which is better than tracking only the entities’ capital and current expenses. Nevertheless, the inefficient allocation of financial resources and deviations from the fiscal budget persist owing to the lack of feasibility studies for programmes. This occurs despite the Social and Fiscal Responsibility Law’s requirement for the elaboration of pre-feasibility and feasibility studies. The challenges of monitoring and evaluating programmes’ performance are made worse because not all entities have proposed detailed plans with objectives by which to assess the relevance of the programmes. Panama needs to improve the public availability of reports regarding budget compliance and programme reviews. The inaccessibility of reports affects Panama’s accountability, transparency and monitoring capacities.

Moreover, sectorial plans have still to be made binding in terms of the implementation of regulatory or investment policies to achieve the objectives highlighted in the Plan Estratégico de Gobierno 2015-2019. To this end, it would be valuable to associate costs to deviations for the budget and delegate the overview of the plans to an independent entity. The Social and Fiscal Responsibility Law requires framing public investment plans with consideration of multi-annual fiscal projections, which results in the Plan Quinquenal de Inversiones. However, the normative framework does not foresee any explicit deterrent actions to prevent deviations from the plan, besides the evaluation done by the MEF. Explicit costs have to be associated with deviations from the plan to make them binding. Indeed, the planned budgets have been exceeded on various occasions, although during the past administration compliance has improved (IMF, 2016). To further improve accountability and transparency, an independent entity from the government should be appointed to oversee compliance with the plans’ budgets. A natural candidate for this role is the Comptroller General of Panama – Contraloría General de la Nación.

Towards better long-term financial governance

This section focuses on key areas affecting long-term financial sustainability. First it analyses the pension system in Panama, then focuses on recent measures to guarantee fiscal sustainability in Panama. Finally, following a review of historical experiences, it discusses the possibility of guaranteeing the solvency of the financial system in the context of deposit runs and the non-existence of a central bank.

The pension system within the Social Security Agency presents a long-term risk to public financial sustainability

The Social Security Agency (SSA) is an autonomous public agency in charge of managing the social security system. The SSA runs four independent programmes: disability, old age and death benefits; health and maternity care; professional risks; and administration. The disability, old age and death benefits account for more than one-half of the overall revenues and expenditures of the SSA. Affiliation to the SSA is mandatory for most workers in the private sector and all workers in the public sector.

Transitioning from a defined-benefit system to a mix of defined benefits and contributions has been a challenge. Before reforms in 2005, the pension system was entirely a defined benefit system, but faced both actuarial and cash deficits. The 2005 reforms tightened the eligibility requirements and raised contribution rates. Strong opposition limited these reforms, and changes in the parameters had the effect of postponing rather than resolving the actuarial imbalance of the defined benefit portion of the system. After the 2005 reform, the system included two subsystems: exclusively defined benefit (old system) and the subsystem of mixed defined benefit and defined contribution (new system). Starting in 2008, all new affiliates entering the system contributed to the new system. For affiliates under the old system, workers earning less than USD 500 a month as well as workers older than 35 years of age in 2008 continued to contribute to the exclusively defined benefit scheme. Workers younger than 35 years and earning more than USD 500 a month had the option of either staying in the old system or contributing to the new system. Even after the reforms, the pension system remains generous by international standards, more than in most Latin American economies.

The legacy defined-benefit pension system contains unfunded liabilities. In the absence of further reforms to the pension system, pension obligations after 2024 could represent an annual cost to the budget of about 2% of gross domestic product (GDP). The unfunded pension liabilities in the exclusively defined-benefit system are estimated at about USD 10 billion. Actuarial studies indicate that the exclusively defined-benefit subsystem will incur losses in cash terms in the short term and reserves will be depleted in 2024. To the extent that the defined-benefit component of the new system has similar features, it is also expected to eventually become unsustainable.

A legislated framework for a sustainable fiscal framework

Panama has introduced a series of laws intended to limit fiscal deficits to sustainable levels while smoothing the stance of fiscal policy and ensuring that it can help offset exogenous shocks.

In 2012, the Panamanian government established a Sovereign Wealth Fund (FAP), or Fondo de Ahorro de Panama. This law built on and amended the 2008 Social and Fiscal Responsibility Law (SFRL), which prescribed limits to the non-financial public sector deficit and public debt levels. The FAP law modified the earlier framework to support countercyclical fiscal policy, by introducing limits to the “adjusted balance”, and to ensure that the rule could absorb significant external shocks. The FAP law set a fiscal consolidation path, from 2.9% of GDP in 2012 to 0.5% in 2018 and thereafter. The revised budget balance rule may also be helpful to enhance credibility and attain stabilisation as economies from the region that have applied fiscal rules are associated with a more stabilising role for fiscal policy (Alberola et al., 2016). The law also introduced a rule intended to mitigate the impact of potential volatility in Canal revenues to the budget by limiting these revenues to 3.5% of GDP, and saving any additional revenues in the FAP, while allowing the fiscal deficit to widen by the amount that contributions from the Canal are less than 3.5% of GDP. The fund was initially financed by absorbing the capital (worth about 3.5% of GDP) from the Fiduciary Fund for Development, which was liquidated.

The FAP law described conditions under which escape clauses could be used and eliminated the possibility of carry-over of funds. The law allows for temporary suspension of deficit ceilings in the cases of:

National emergency declared by the Cabinet. In this case, the maximum additional deficit cannot exceed 1.5% of GDP in the year the emergency occurs or the cost associated with the emergency, whichever is less;

Economic deceleration when GDP grows 2% or less during two consecutive quarters. In this case, the maximum additional deficit allowed is scaled to the magnitude of the deceleration but capped at 2% of GDP. The return to the ceiling should be achieved by the third year with one-third of the needed adjustment in each year. The waiver may be maintained for three consecutive years only as long as the rate of growth of real GDP remains below 2%.

Maintaining the discipline laid out in these laws in practice has been challenging, resulting in amendments to the laws as deficits have exceeded targets. In 2014, the deficit ceilings were changed through one-off amendments to the law, to permit a fiscal deficit of 4.1% of GDP, 1.4% of GDP beyond the limits in the original law.

Towards a lender of last resort in Panama

Panama’s history of financial stability reinforces the perception of a highly liquid, self-disciplined and resilient banking sector. The only systemic banking crisis in the last 45 years was the crisis of 1988-89, which was political in origin. There has not been any systemic banking crisis caused by contagion from foreign financial markets nor from excessive risk taking. Bank failures have been isolated cases with no contagion effects to other domestic banks, even during the 2008-09 global financial crisis. This resilience has shaped the view that the lack of backstops reinforces extreme market discipline, so that banks are very conservative at managing their risks, in particular by holding a large amount of liquidity.

Panama does not have several of the standard fiduciary regulatory institutions and this increases the potential impacts of stress in the financial sector. The absence of a central bank makes Panama the only country in the region that has neither a deposit insurance scheme nor a lender of last resort (LOLR) facility. However, historical experiences show it is possible to insure against deposit runs in the absence of a central bank and they underline the role of the banks in such design (Box 5.2). In addition, market mechanisms do not seem to operate smoothly in allocating liquidity among Panamanian banks, as the interbank market is segmented. Indeed, foreign banks tend to lend only to larger domestic banks. Most countries’ financial stability frameworks include institutional arrangements and market-based solutions to mitigate liquidity risk. Deposit insurance schemes reduce the ex-ante probability of bank runs and LOLR facilities provide ex-post support to prevent illiquidity at an individual bank level, in order to contain contagion risk. Similarly, a well-functioning interbank market can be instrumental in managing idiosyncratic liquidity shortages by redistributing aggregate liquidity during periods of stress. The Financial Stimulus Programme in 2009, in which banks made little use of those resources (mainly because both their liquidity and the cost of such resources were relatively high), are useful to take into consideration for an effective design in the future of such mechanisms.

Box 5.2. Lender of last resort from a historical perspective: Lessons for Panama from earlier experiences

History offers some examples of how bank runs can be addressed in the absence of a central bank. Under full dollarisation, authorities cannot generally engage in lender of last resort policies in the event of a liquidity crisis. However, alternatives to a central bank liquidity provision might be found, and these can offer some lessons for Panama.

Before the general expansion of central banking, several countries adopted banking systems in which banks’ formal or informal co-operation and government intervention attempted to avert banking runs in a context of notes’ convertibility to gold or silver and fractional reserves. The international experience is diverse and despite occasional failures some countries manage to set up stable banking systems.

In the case of Canada, between 1867 and 1934 no institutional mechanism against banking runs was established, but the country managed to avoid them successfully. The banking sector consisted of a relatively limited number of large, multi-branch banks, lightly regulated but with very strict limits to entry. The Canadian Bankers Association, established in 1891, served to regulate banks and deal with bank failures, thereby mitigating their effects (Calomiris and Gorton, 1991). This body could guarantee the failing banks’ liabilities while distributing their assets and branches among the guaranteeing banks (Bordo, Redish, and Rockoff, 2015).

From 1837-1913, prior to the creation of the Federal Reserve System, the US banking system operated without a central bank. However, a private substitute for a public lender of last resort progressively emerged as members of the main financial centres’ clearing houses pooled their liquid resources during crises. In addition to the traditional role of clearing houses, during the banking panic of 1857, the New York City clearinghouse started issuing emergency liquidity to the banks in the form of loan certificates (Gorton, 1985). To access these facilities and therefore to obtain resources in case of a bank run, a member bank needed to submit collateral to the clearinghouse’s loan committee. After assessing the value of the posted collateral and applying a haircut, the committee issued one- to three-month debt certificates which were \ backed by the bank’s portfolio of assets, jointly guaranteed by all clearinghouse members and paid an interest rate. Debtor banks could then use the certificates instead of cash to pay creditor banks in the clearing process. During the panics of 1893 and 1907, clearinghouses even allowed banks to redeem deposits to the public in loan certificates (Gorton, 1985). At the same time, clearinghouses also closely supervised their member banks by auditing their balance sheets and subjecting them to capital and reserve requirements.

The clearing houses’ activities during banking crises were very similar to those of a central bank (Gorton, 1985). However, clearing houses differed from traditional central banks because they did not directly issue currency to the public. Instead their main role was to stimulate interbank lending during crises (Hoag, 2016). In addition, restrictions in clearing-house membership had negative consequences as non-member banks that were not subject to regulation engaged in riskier investment decisions, which threatened the stability of the overall financial system (Jaremski, 2017). In contrast to a central bank issuing its own currency, clearing houses also did not have unlimited ability to expand liquidity. Nevertheless, they appear to have played a stabilising role during banking panics.

In Argentina, following the currency and banking crisis of 1890, free banking was abandoned and two new institutions were constituted, the Caja de Conversión and the Banco de la Nación Argentina (BNA). The former was the first Argentinian currency board. It was in charge of the monetary issue and established the convertibility of the currency (Gomez, 2016). The latter acted both as a government and as a commercial bank, and increasingly assumed functions of lender of last resort, albeit with limited rediscount capacity (Capie et al., 1994; Della Paolera and Taylor, 2001). The functions of both institutions were strictly separated, in an attempt to boost the confidence in the monetary regime (gold standard). Only under exceptional circumstances could the BNA have access to the reserves and funds granting the convertibility of the currency, for which authorisation had to be obtained from the Ministry of Finance. The system operated successfully until 1914 and the BNA occasionally intervened providing credit and rediscounting bills to banks in financial distress.

Sources: Box prepared by Olivier Accominotti, Associate Professor, London School of Economics and Political Science, and Juan Flores, Associate Professor, Université de Genève.

Towards better international transparency and exchange of information to rebuild reputation

The unauthorised release of about 11.5 million documents from Mossack Fonseca, a Panama-based law firm, in April 2016, raised serious reputational risks for Panama. The result of years of secretive investigation by journalists and data scientists, the leak included 2.6 terabytes of data from about 215 000 offshore bank accounts and shell companies over the period 1977–2015 (Santiso and Roseth, 2017). Although the immediate macroeconomic, direct impact seems to be low, the reputational risk could have widespread impact on the country. Legal services related to incorporations (the establishment and selling of companies, foundations and trusts) are estimated to represent only around 0.7% of GDP (IMF, 2016). Following leak of data from the Mossack Fonseca documents, the sovereign bond spread remained stable and low at close to 200 basis points. However, there is concern that the lack of confidence and the reputation of the country in international markets could have important effects on foreign investment and service sectors of the economy (see Chapter 2), including the operations linked to financial markets.

In 2016, following the leaks, the G20 announced plans to prepare lists, by July 2017, of jurisdictions that are non-cooperative with regard to implementation of tax transparency standards. The European Union also announced similar plans with tax transparency as one of three key criteria for determining a jurisdiction as co-operative and with the list to be prepared by end of 2017. To minimise the reputational damage for the country, and to avoid being put in the G20 or EU lists of non-cooperative jurisdictions (thus risking further reputational damage and possible defensive measures), Panama should demonstrate effective implementation of the global standards of transparency and exchange of tax information. Following the data leaks, in 2016, Panama took several steps in this regard. While its 2016 peer review report, which assessed the effective implementation of the international standard of exchange of information on request (EOIR), rated Panama as overall non-compliant, Panama brought about many changes to its legal framework and its practices for exchange of information to address the recommendations made in the report.

In May 2016, Panama also committed to the international standard of Automatic Exchange of Financial Account Information, and in October 2016 signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters. The first test of these changes is likely to take place under a fast-track review procedure put in place by the Global Forum on Transparency and Exchange of Information for Tax Purposes2 in the first half of 2017, as well as a new round of peer reviews that will follow shortly afterwards.

Advances in the exchange of information on request for tax purposes

Since Panama joined the Global Forum in 2009, and following several interactions and recommendations from the Global Forum, some progress has been achieved to improve the exchange of information. Starting with the Phase 1 Peer Review by the Global Forum in September 2010 to assess the EOIR legal and regulatory framework, and followed by two supplementary reviews in 2014 and 2015, Panama has advanced key legislative changes (OECD, 2010). This includes the introduction of a mechanism to identify the owners of bearer shares and their custodial regimes, the enhancement of its Anti-Money Laundering framework, and the signing of some treaties enabling exchange of information. In light of these actions undertaken, the Global Forum concluded in 2015 that Panama was in a position to move to its Phase 2 Peer Review which examines EOIR in practice.

Following the Phase 2 Peer Review Report adopted by the Global Forum in November 2016, Panama has undertaken key measures aimed to comply with international standards on EOIR. Panama’s Phase 2 review rated Panama overall as non-compliant with the EOIR standard and showed that Panama experienced serious difficulties in obtaining and exchanging information for tax purposes during the 2012-15 review period (OECD, 2016a). Since the review was completed, Panama has addressed many of the recommendations made by the Global Forum. Some of these measures included amendments to its domestic legislation. These amendments aim to introduce an enhanced strike-off regime regarding deemed inactive companies; eliminate uncertainty regarding bearer shares, by clarifying that bearer shares that have not been deposited with a custodian are cancelled and cannot be reactivated or restored; introduce requirements to keep accounting information for all relevant entities and enhance their access powers and enforcement provisions; and reorganise its Competent Authority office, processes and procedures with substantial new resources allocated.

The Global Forum in November 2016 agreed on a fast-track review procedure to assess changes made by jurisdictions with partially compliant or non-compliant ratings, with the evaluation to be made in the first half of 2017, and the results communicated to the G20 for the purposes of consideration in preparation of the list of non-cooperative jurisdictions. Consequently, Panama underwent the fast-track review procedure in the first half of 2017 and the Global Forum assigned the following provisional up-grade to Panama as a largely compliant country. A new round of reviews will follow this decision. Finally, over the past years, Panama has received EOI requests from a number of jurisdictions in Europe and North America, including OECD countries. Panama’s responses and communications regarding EOIR have improved as it works towards complying more fully with the international standards.

Recent commitments to implement the automatic exchange of information and to tackle tax avoidance and evasion

In May 2016 Panama committed to implementing the international standard of Automatic Exchange of Financial Account Information (AEOI), the Common Reporting Standard endorsed by G20 leaders and the Global Forum, with exchanges starting in 2018. With this commitment, Panama joins the other 99 jurisdictions that have committed to implementing the AEOI standard by 2017 and 2018. Significantly, at the end of 2016 Panama passed domestic legislation regarding the implementation of the AEOI. In addition, Panama has been in contact with some OECD countries to initiate AEOI and put in place an international legal framework for automatic exchanges. In particular, some advancement has been realised with Germany and Japan. At the end of October 2016 Panama signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters, greatly extending its exchange of information network. This convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance, a top priority for all countries. The convention was ratified in March 2017.

At the end of October 2016, Panama also joined the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Strengthening the international tax rules of Panama, including through the implementation of the recommendations of the BEPS project, will help create a more even playing field, which will enhance the reputation of the country. The recent move towards Automatic Exchange of Information for Tax Purposes will help fight tax evasion and give greater scope to tax both domestic and foreign-source income earned by tax-resident businesses and households. Finally, Panama may also want to strengthen its tax administration in order to reduce tax evasion as part of a broader tax reform strategy that aims at increasing productivity and reducing inequality. Twelve Latin American countries – Argentina, Brazil, Chile, Colombia, Costa Rica, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru and Uruguay – are among the 94 countries that have joined the inclusive framework on BEPS.

Better regulation and institutions to entrepreneurship and private sector involvement

Panama’s business regulation to promote entrepreneurship ranks well but there is room for improvement

To promote entrepreneurship and the long-term ability of firms to accumulate in-house innovation capabilities, policies should go beyond greater expenditure on research and development. In addition to the education and skills challenges (see Chapter 3), business environment and regulation can affect entrepreneurship.

Panama has introduced programmes to support start-ups since 2010. This is similar to some Latin American economies, such as Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay. Unlike more traditional policies to support innovation and competitiveness, these programmes have evolved rapidly. In the space of a few years they have taken on a different design, focus and structure. Results are beginning to emerge, especially regarding people’s perceptions of the region and its image as a place for innovative entrepreneurship (OECD, 2016b). These policies are fundamental to guaranteeing that entrepreneurship is a choice rather than an obligation that can affect formal jobs (OECD/CAF/ECLAC, 2016).

While political corruption and improvements in the judicial system (including contract enforcement) remain a concern in Panama (see Chapter 5), Panama ranks well in practices regarding regulations concerned with starting businesses and entrepreneurship.

Over the last decade Panama has taken action to simplify business regulations and strengthen legal institutions to promote formal business practices. For instance, the World Bank Doing Business indicator regarding the cost of starting a business in Panama fell to 5.8% of income per capita in 2016 from 14.6% of income per capita in 2005, placing Panama better than most Latin American economies and the average of benchmark economies. Similarly, its worldwide position regarding red tape is backed up by time and number of procedures needed to start a business. With only five procedures and six days to start a business, Panama ranks as one of the best performers in the region and better than the average of benchmark economies. In addition, property rights including financial assets are perceived to be well-protected (World Bank, 2016).

The OECD’s Indicators of Product Market Regulation (PMR) are a set of comprehensive and internationally comparable indicators that measure the degree to which policies promote or inhibit competition in many areas of the product market. Alongside the pillars of state control and barriers to trade and investment, barriers to entrepreneurship constitute the third pillar with which to analyse product market regulation in the OECD framework (Barbiero et al., 2015). Based on the PMR indicators, the World Bank and the OECD have jointly compiled quantitative indicators measuring the extent to which regulation in emerging-market economies promotes or inhibits competition in product markets. In the case of Panama and five other Latin American economies, a PMR indicator has been compiled through collaboration among the World Bank, the Inter-American Development Bank and the OECD.

Panama diverges from the rest of the region by exhibiting low barriers to entrepreneurship that are similar to the OECD average. The “barriers to entrepreneurship” component of the PMR measures the extent to which regulations facilitate or inhibit the entry of new firms. This component captures the complexity of regulation related to licence and permit systems, and to communication of those rules and procedures; the administrative burdens on start-ups (e.g. number of procedures and bodies needed to contact to register a company); and the regulatory protection of incumbents through legal barriers to entry and antitrust exemptions (Barbiero et al., 2015). In these three categories Panama ranks well compared to Latin American economies and the average of benchmark economies (Figure 5.6). However, there is room for improvement in the “complexity of regulatory procedures” component, and in particular in aspects related to communication and simplification of rules and procedures. In that respect, Panama’s gap remains particularly high compared to best practices in OECD benchmark countries, such as Australia, Korea, Netherlands and New Zealand. Also, as highlighted below, in a sub-component of the regulatory protection of incumbents (i.e. barriers in network sectors), Panama should still increase competition.

Figure 5.6. Barriers to entrepreneurship index (Product Market Regulation)
(Scale 0 to 6 from least to most restrictive)

Note: In the case of Panama (2015 data), the PMR indicator has been compiled through collaboration among the World Bank, the Inter-American Development Bank and the OECD. The result for Panama is reported as preliminary. LAC (Latin American and the Caribbean) countries are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.

Source: OECD PMR database for all OECD economies, and OECD-World Bank Group PMR database for other Latin American economies. For Panama the data are for 2015, and for all others the data are 2013.

Stronger competition, regulatory and institutional framework should promote further entrepreneurship

Competition among firms can lead to increased productivity and economic growth. Policies promoting competition, entry of new firms in the market and expansion of existing firms may have a relevant impact on improving total factor productivity. Experiences across different industries in emerging and developed markets corroborate this positive relationship (Lewis, 2004; Cole and Ohanian, 2004). Furthermore, policies that promote competitive markets, such as enforcing competition law and removing regulations that restrict competition, result in faster economic growth (OECD, 2013).

Eliminating barriers in the network sectors should promote competition in Panama. Following the Indicators of Product Market Regulation described above, the category “regulatory protection of incumbents” has three sub-components: legal barriers to entry, antitrust exemptions and barriers in network sectors (Barbiero et al., 2015). While Panama performs at the OECD levels for the first two sub-components, improvements in the third are needed. Barriers in the network sectors (i.e. telecommunications, utilities, post, rail, air passenger transport and roads) hinder competition. The OECD’s Competition Assessment Toolkit could be used to assess regulation applicable to those sectors in order to identify competition restrictions and propose less-restrictive measures. In contrast, Panama’s legal system performs well in preventing anti-trust behaviours and establishes few legal barriers for the entry of new firms.

Acknowledging the benefits of competition, the Panamanian constitution safeguards free competition and unhindered access to markets. The Autoridad de Protección al Consumidor y Defensa de la Competencia (ACODECO) is responsible for guaranteeing compliance with competition policies and for protecting consumer rights and interests. ACODECO is a public body independent of the central government and comprises two directorates, one focused on consumer protection and the other on competition policies. Fulfilling its role as a competition regulator, ACODECO’s National Directorate of Free Competition keeps watch on market competition through market studies and technical reports to identify and discourage monopolistic practices. The selection of markets studied follows suggestions from government agencies, consumers and research carried out at ACODECO. This selection process is further refined by considering, among others, market structure, size and impact to consumers. Based on the National Directorate of Free Competition’s assessments, ACODECO advances competition advocacy and recommends concrete pro-competition measures to be undertaken by governments and regulatory agencies.

ACODECO’s investigations may lead to the prohibition of monopolistic behaviour or efficiency-reducing mergers. Such investigations may include dawn raids to collect information when authorised by a judge. Moreover, if a court confirms the existence of anti-competitive practices, ACODECO indicates the appropriate measures. In the case of mergers, the agency can modify the conditions of the transaction or prevent the merger from taking place. Sanctions imposed for monopolistic practices may include fines up to USD 1 million (OECD/IDB, 2010). The fines collected in 2016 amounted to USD 1.67 million and USD 3.37 million in 2015 (ACODECO, 2017).

ACODECO has improved both transparency and accountability by adopting strategic objectives and the corresponding results-based framework. Yet ACODECO should develop a framework for assessing impact of advocacy/promotion measures regarding the importance of competition. ACODECO should also asses the implementation of the recommendations resulting from market studies, and quantify the economic benefits of the recommendations (OECD, 2015b).

Although the management and results of ACODECO have been positive in the selection of competition cases and in advocacy campaigns, its limited budget and workforce affect its performance. The number of ACODECO staff increased to 620 employees in 2015 from 248 in 2005, yet it fell to 482 employees during the past two years owing to budget constraints. The increasing number of on-going investigations into monopolistic practices demands further staff and budget. ACODECO’s advocacy programmes on consumer rights reached about 38 000 people in 2016. It is therefore fundamental to continue promoting the benefits of competition, both among citizens and policy makers. The implementation of multi-annual budgets would contribute to consolidating the independence of ACODECO.

A complete set of recommendations on how to foster competition in Panama could be achieved through a peer review of competition law and policy. The OECD country reviews of national competition laws and policies assess how each country handles competition and regulatory issues, from the soundness of its competition law to the structure and effectiveness of its competition institutions. A competition law and policy peer review in Panama was carried out in 2010 (OECD/IDB, 2010). In addition, in 2015 the OECD published a report focusing on market studies covering six Latin American countries including Panama (OECD, 2015b). Seven years after the first peer review report, Panama would now benefit from an updated assessment, in light of the changing market conditions and the results of the first review. Panama’s regulations in the network sectors could also be subject to a competition assessment on the basis of the OECD’s Competition Assessment Toolkit to identify competition restrictions imposed by the regulation and to point to less restrictive measures.

Towards sound regulatory and institutional frameworks for public-private partnerships in Panama

Public-private partnership projects on transport in Latin American countries have been inefficient and have led to increases in the total cost of these projects. The performance of concessions is determined by the contract, and by regulatory and institutional design. Flaws in the design of concession contracts have caused excessive costs in Latin America (OECD/ECLAC, 2012). For instance, in the case of Chile, Colombia and Peru for the period 1993-2010, 50 out of 61 road contracts have been modified at least once, resulting in more than 540 renegotiations. All modified contracts were changed for the first time less than three years after the initial signing of the concession (Bitran, Nieto-Parra and Robledo, 2013).

Between 2012 and 2014, Panama descended to 14th place from 11th place out of 19 countries on the environment for public-private partnerships, the biggest deterioration in ranking of all Latin American and Caribbean (LAC) countries. In particular, Panama showed inefficiencies on public-private partnerships in three key components, and ranks at the bottom of the 19 LAC countries covered. First, regarding the institutional framework, Panama needs to improve the quality of institutional design, the design of public-private partnerships contracts, and the management of hold-up and expropriation risks. Only Ecuador and Venezuela rank worse than Panama for this component. Second, regarding operational maturity, there is low public capacity to plan and oversee public-private partnerships as well as methods and criteria for awarding projects, and poor regulators’ risk allocation. Third, sub-national adjustments, including sub-national activities and capacities on public-private partnerships at local level, should be improved. Panama ranks at the bottom among countries covered. Regarding the two last components, only Venezuela ranks worse than Panama (EIU, 2015).

Panama needs to update current legislation on public-private partnerships. The law regulating concession projects, including roads and airports, is from 1988 (Law No. 5 of 1988). In 2011 a law proposal was withdrawn at the Congress. A key actor in road concessions is the Empresa Nacional de Autopistas S.A. (ENA), or the National Road Company. ENA is a state-owned company created in 2010 that can undertake road concessions directly or invest in private sector transport companies. The institutional framework of the ENA encourages fiscal discipline and incentivises public-private partnerships where value for money exists. However, ENA can initiate concessions by itself, crowding out private participation and raising possible conflicts of interest within the institution.

Sound regulatory and institutional frameworks are fundamental to increasing the effectiveness of public-private partnerships in Panama. Weaknesses in the prioritisation and planning phases cause inefficiencies in public-private partnership projects. Empirical analysis in Latin American economies, such as Chile, Colombia and Peru, suggests that state-led renegotiations, which were more common than firm-led renegotiations, were motivated by the opportunistic behaviour of governments. State-led renegotiations that added new stretches of roads and that included additional complementary works during governments’ last year in office were costlier than other renegotiations (Bitran, Nieto-Parra and Robledo, 2013). Furthermore, delays and inefficiencies in the processes of environmental and land licensing as well as consultation with local actors have affected the timing and certainty of concession contracts in the region. Finally, most of the concession schemes at national level do not apply to regional and municipal governments, affecting the capacity to undertake effective public-private partnerships at local level. Future legislation in Panama regarding public-private partnerships should take into consideration measures to avoid these inefficiencies. Ex-ante feasibility studies and the institutional framework supporting value-for-money evaluations could help solve difficulties at the stages highlighted above.

Environmental sustainability to green growth in Panama

Environmental factors will also have a bearing on the sustainability of Panama’s development in the medium to long term. Looking forward, the changing sectoral composition of Panama’s economy may intensify the environmental impact of growth. The country’s regulatory framework and institutional capacity need to be ready to ensure that economic progress does not come at the cost of environmental degradation.

Panama’s infrastructure and services-dominated development model has put the country on a relatively low-carbon growth path. The carbon intensity of Panama’s economy has fallen since 1990 and while CO2 emissions per capita have risen in the same period, they still remain low relative to the benchmark economies (Figure 5.7).

Figure 5.7. Panama’s CO2 emissions are relatively low compared to benchmark economies

Source: World Bank (2017), World Development Indicators,

Looking forward, the changing sectoral composition of Panama’s economy may intensify the environmental impact of growth. Tourism and mining, two potential growth sectors in Panama, can bring with them considerable local environmental impacts such as habitat loss, natural resource depletion, and water, air and soil pollution. In addition, they could potentially increase the carbon intensity of growth depending on how the energy requirements of the sectors are met.

Meeting the growing demand for energy has so far relied on the increased use of fossil fuels. Since the 1990s the expansion of energy supply has been achieved through a greater reliance on fossil fuels (especially oil products and coal), and the share of renewable energy has fallen by 22 percentage points to 19% in 2014 (Figure 5.8). As Chapter 2 showed, energy supply is already a constraint reported by firms in Panama. The need to increase the energy supply will be even greater if the economy shifts towards energy-intensive sectors such as mining. Already, a 300-megawatt coal-fired power plant is proposed to power the Cobre Panama open-pit copper development project. Coal is the most CO2-intensive fuel, but even beyond greenhouse gas emissions coal-fired power plants have local environmental and health consequences through emissions of SO2, NOx and particulate matter. This is a particular concern given that levels of PM2.5 air pollution have already started to creep up again after having declined in the 2000s.

Figure 5.8. The share of renewables in Panama’s energy mix has been falling
Renewable energy as percentage of primary energy supply, 1980-2014

Source: OECD (2017), Renewable energy (indicator), (accessed in June 2017).

Panama has stated its commitment to pursuing a low-carbon development path. Its nationally determined contribution to the United Nations Framework Convention on Climate Change Paris Agreement states the goal to increase the installed capacity from renewable sources such as wind and solar by 30%, and the Plan Energético Nacional 2015-2050 (National Energy Plan 2015-2050) establishes that 15% of Panama’s generation capacity will come from renewables by 2030 and 50% by 2050 (Secretaría Nacional de Energía, 2016). The government is also bringing liquefied natural gas (LNG) into the country’s energy mix. A planned LNG facility will displace at least 2 100 gigawatt hours of power currently generated from heavy fuel oil and diesel and will offset 4% of Panama’s CO2 emissions each year.

Water management has been a perennial priority given the importance of the Panama Canal to the economy. The Canal requires huge volumes of fresh water drawn from the Panama Canal Watershed (PCW) to operate. The PCW also provides drinking water for 95% of the population in the cities of Colón (207 000 people), Panamá (881 000 people), San Miguelito (315 000 people) and, in the near future, in La Chorrera (161 000 people).3 The original Panama Canal uses 52 million gallons of fresh water for each ship that passes through, equal to the daily domestic consumption of 500 000 Panamanians (Carse, 2012). With an average of 40 ships crossing the isthmus each day, this amounts to 2 billion gallons in total daily. The Canal expansion has nearly doubled the water demand, requiring an additional 1.8 billion gallons of fresh water per day. Ensuring an adequate water supply for the Canal’s operations and for the population in the PCW is a challenge that is periodically exacerbated by El Niño. This weather system occurs every two to seven years, bringing drought to Panama and lowering the water level in the Canal, limiting the size of ships that can pass through.

Panama practises integrated watershed management that combines engineered technologies with land use planning and environmental regulations. Integrated watershed management has been practised since the signing of the Canal Treaties in 1977 (Carse, 2012). Deforestation leads to increased run-off from the land that deposits sediment into the Canal, threatening its operations. In addition to the system of locks, dams, reservoirs and hydrographic stations, the watershed’s forests are considered to serve the Canal and form an integral part of managing its water supply. The Panamanian government has acted to protect the remaining watershed forests, launched reforestation initiatives and restricted farming practices in order to ensure an adequate supply of water for the operation of the Canal.

Astute water management will remain critical to Panama’s development. Increased water demand from the expanded Canal combined with a growing urban population puts the country at risk of water stress. It is predicted that by 2040, Panama City will become threatened by water supply vulnerability as urban sector demand increases and the supply basin fails to simultaneously meet demands from human, environmental and agricultural users (Padowski and Gorelick, 2014). Changing weather patterns due to climate change will also need to be factored in to the long-term planning for PCW management. Water quality as well is a concern that will need careful monitoring as the environmental impact of the Canal expansion unfolds. Seawater intrusion of Lake Gatun, for example, has been cited as one of the risks (Jongeling, 2005).

Despite efforts, deforestation is a concern in parts of the country. Today over 60% of Panama’s land is covered by forests and the country’s annual deforestation rate has remained stable at 0.4% per year between 1990 and 2015 (FAO, 2015), a lower rate than in previous decades. However, deforestation remains a concern in certain regions, such as the Colón, Darién and Bocas del Toro provinces, where it could initiate a process of soil erosion and nutrient depletion of the land, contribute to greenhouse gas emissions and threaten biodiversity (Figure 5.9). Panama enjoys the most diverse wildlife of all Central American countries and its forests form an important corridor for migrating birds and animals. Forests have been cut down to make way for roads, agriculture, cattle ranching and mining, and illegal logging is a particular concern. The government has been taking action to address the problem. For example, it signed the Agreement for the Establishment of the Legal Timber Network, which is intended to promote policies for the responsible purchase of forest products (FAO, 2017). It has also expanded designated protected areas (now 27% of the country is protected), although there has been mixed success in terms of its ability to control deforestation: some protected areas have been relatively effective while others, such as Palo Seco and La Amistad, have not (Oestreicher et al., 2009).

Figure 5.9. Many species are under threat in Panama

Source: World Bank (2017), World Development Indicators,

Going forward, there are signs that Panama’s development trajectory and in particular the emergence of new sectors such as mining and tourism will result in greater environmental impact of economic activity. The regulatory framework and institutional capacity need to be ready to ensure that economic progress does not come at the cost of environmental degradation. As well as resulting in the loss of a resource of intrinsic value, environmental degradation could constrain further development. The Ministry of Trade and Industry announced in 2015 that the government was working on a reform package to overhaul the institutional and environmental framework for mining activities. The environmental implications of any reforms need to be carefully scrutinised. With regards to tourism, the government is taking steps to sustainably develop the sector. In 2016, the Ministry of Environment, the Tourism Authority and the National Institute of Culture with the support of the Chamber of Tourism presented their vision for the development of the sector along with plans to develop a Green Tourism action plan.


Rebuilding confidence and trust in institutions is fundamental to achieving Panama’s agenda for development and therefore inclusive growth. Better institutional capacity to deliver public services to citizens is also fundamental to move towards a social contract in the country. At the international level, the effective implementation of international transparency and exchange of information should rebuild confidence in the international arenas.

In addition, to increase the soundness of financial sustainability in the economy, the progress achieved in the past five years at the fiscal level could be expanded to a better management of the pension system and the solvency of the financial system through a lender of last resort in case of deposit runs.

Sound institutional and regulatory frameworks are fundamental to enhance entrepreneurship and promote private sector involvement in public services. Compared to other Latin American economies, Panama ranks well in policies promoting entrepreneurship. However, there is room for improvement in the complexity of regulatory procedures and in barriers in network sectors to increase competition. Regarding public-private partnerships, Panama needs to enhance both the regulatory and institutional frameworks.

Finally, to move towards a green growth economy, the regulatory framework and institutional capacity need to be ready to ensure that economic progress does not come at the cost of environmental degradation. Recent efforts by the Ministry of Environment are steps in that direction.


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← 1. See for further OECD analysis of the role of Centre of Government (CoG).

← 2. The Global Forum on Transparency and Exchange of Information for Tax Purposes has 139 member jurisdictions, all of which have committed to the standard on exchange of information “on request”. In addition, 100 jurisdictions including two non-members, Faroe Islands and Greenland, have committed to implementing the standard of automatic exchange of financial account information (the Common Reporting Standard) with exchanges starting in 2017 or 2018. Furthermore, 106 jurisdictions have joined the multilateral Convention on Mutual Administrative Assistance in Tax Matters.

← 3. See