Panama WT/TPR/S/186 
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I. ECONOMIC ENVIRONMENT 
(1) OVERVIEW  
1. Panama has enjoyed robust economic growth over the last few years, with GDP expanding at 
an annual average rate of 4.9 per cent between 2000 and 2006, despite a slowdown at the start of the 
decade.  As a result, per capita  GDP increased by 30 per cent in nominal terms between 2000 and 
2006, to just over US$5,200.  The main engines of  growth since 2002 have been private consumption 
and investment, with exports also playing a key role since 2004. 
2. Much of the recent economic expansion has been the outcome of favourable external 
conditions and prudent macroeconomic policies.  As it uses the dollar as its currency, Panama does 
not have its own monetary policy instruments,  and fiscal policy is the authorities' main 
macroeconomic tool. Accordingly, the policy to put public finance on to a sound basis is particularly 
important, especially the reform of the Caja de Seguros Social  – CSS (Social Security Fund) 
implemented over the last few years.  The total pub lic debt has shrunk in relation to GDP, although its 
2006 level of 61.1 per cent remains high.  The ma croeconomic situation has been boosted by the 
approval given for the expansion of the Panama Ca nal, which remains a major catalyst for private 
investments in the country.  Nonetheless, shortcomings  in education, relative institutional fragility and 
domestic regional inequalities continue to po se challenges for the country's development. 
3. Panama's balance of payments on current account  is traditionally in deficit, and has been 
financed by surpluses on the capital and financial ac counts.  International trade in goods and services 
plays a vital role for the country's economy and was equivalent to 143 per cent of GDP in 2006.  
Panama has positioned itself as a major supplier of services such as telecommunications; tourism; 
financial services; port, cargo storage and distributio n services; as well as transit through the canal.  
The latter is fundamentally important for Panama a nd, in turn, makes the country a crucial link in 
world trade.  Panama's merchandise trade has diversif ied in recent years, and the share of its main 
trading partner, the United States, has shrunk from 35.5 per cent in 2000 to 30.8 per cent in 2005.  
Foreign investment flows into Panama have also grown over the last few years. 
(2) MACROECONOMIC TRENDS  
(i) Economic structure and trends 
4. The Panamanian economy is dominated by servi ce activities, which contribute just over 
80 per cent of GDP (Table I.1).  Its sector co mposition has undergone a number of changes since 
2000, as the more internationally competitive sect ors – transport and communications, financial 
intermediation and tourism – have outpaced the re st of the economy.  Since 2003, the construction 
sector has benefited from low interest rates, a nd its expansion has invigorated the economy as a 
whole.1  The GDP shares of the agriculture and manu facturing sectors declined in the period 2000-
2006, with the manufacturing sector, in particular, a ffected by a loss of competitiveness in the textile 
segment and the 2003 closure of the country's single oil refinery. 
                                                      
1 ECLAC (2006). WT/TPR/S/186 Trade Policy Review 
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Table I.1  
Basic economic indicators, 2000-2006  
 2000 2001 2002 2003 2004 2005 2006(a) 
Gross domestic product (GDP)        
Real GDP (US$ million)b 11,371 11,436 11,691 12,183 13,099 14,005 15,142 
Nominal GDP (US$ million) 11, 621 11,808 12,272 12,933 14,179 15,483 17,097 
Nominal GDP per capita (US$) 3,942 3,931 4,010 4,150 4,470 4,796 5,206 
Sector structure of GDP (% of real GDP)        
Agriculture and livestock 5.3 5.1 4.8 4.8 4.5 4.4 4.4 
Fisheries 1.7 2.3 2.7 3.1 2.9 2.8 2.4 
Mining and quarrying 0.7 0.7 0.8 1.0 1.0 1.0 1.0 
Manufacturing 9.6 9.0 8.5 7.9 7.5 7.3 7.0 
Primary and industrial sector 17.4 17.1 16.8 16.8 15.9 15.4 14.7 
Electricity, gas and water 3.3 3.1 3.3 3.2 3.1 3.1 2.9 
Construction 4.7 3.7 3.3 4.2 4.5 4.3 4.6 
Commerce 14.6 14.9 14.3 13.9 14.4 14.5 15.0 
Hotels and restaurants 2.1 2.3 2.4 2.5 2.7 2.8 2.9 
Transport, storage and communications 15.2 15.5 15.4 16.4 17.5 18.2 19.1 
Financial intermediation 9.9 9.5 8.7 7.7 6.8 7.4 7.7 
Real estate, rental and business se rvices 15.6 15.7 16.0 16.1 16.1 16.1 15.7 
Public administration and defence 4.6 4.5 4.4 3.9 4.0 3.5 .. 
Other public and private services 10.5 11.1 11.5 11.7 10.9 10.5 13.4(c) 
Services  80.5 80.3 79.3 79.1 80.0 80.5 81.1 
Plus taxes 5.9 6.0 6.5 6.2 6.1 6.3 6.2 
Less financial intermediation services measured 
indirectly 3.7 3.2 2.5 2.5 2.0 2.1 2.4 
Total GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 
Employment (% of total working population)d        
Agriculture .. .. .. .. 18.1 18.1 18.4 
Fisheries .. .. .. .. 1.2 1.1 1.2 
Mining and quarrying .. .. .. .. 0.1 0.1 0.2 
Manufacturing .. .. .. .. 9.5 9.1 9.0 
Electricity, gas and water .. .. .. .. 0.7 0.6 0.7 
Construction .. .. .. .. 7.5 7.2 7.9 
Commerce .. .. .. .. 17.5 18.1 18.0 
Hotels and restaurants .. .. .. .. 5.1 5.5 5.0 
Transport, storage and communications .. .. .. .. 7.4 7.3 7.1 
Financial intermediation .. .. .. .. 2.1 1.9 2.0 
Real estate, rental and business services .. .. .. .. 4.5 4.9 4.7 
Public administration and defence .. .. .. .. 6.2 5.5 5.5 
Other public and private services .. .. .. .. 20.4 20.5 20.3 
Memorandum item        
Population (thousand)e 2,948 3,004 3,060 3,116 3,172 3,228 3,284 
Open unemployment ratef 8.8 11.2 10.9 10.9 9.2 7.6 6.5 
Average nominal wages (US$) 3,753 3,728 3,769 3,905 4,052 .. .. 
.. Not available. 
a GDP data for 2006 are estimates. 
b Real GDP at 1996 consumer prices. 
c Equivalent to aggregate data for public admini stration and other public and private services.  
d Data obtained from household surv eys conducted in August each year. 
e Population estimated from the 2000 census. f Unemployed labour force actually seeking employment, as a pe rcentage of the economically ac tive population.  The calculation 
methodology was changed as of 2001. 
Source : Statistics and Census Depart ment, Office of the Comptroller General of the Republic.  Panama WT/TPR/S/186 
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5. The Panamanian economy entered a downswing pha se in 1999 as a result of factors such as 
the closure of American military bases, rising inte rnational interest rates and a slowdown in lending 
for domestic consumption.  In 2001, the adverse international economic climate also affected the 
country's exports, which stagnated al ong with the economy in general during that year (Table I.2).  In 
response to this slowdown, in 2000-2003 the Gove rnment implemented a countercyclical fiscal policy 
to expand investment and pub lic expenditure (see below). 
6. The economy began to recover as from late 2002, driven mainly by growth in private-sector 
domestic demand;  and the revival of domestic credit (in response to lower interest rates) in particular 
boosted the expansion of private consumption.  Ther e was also a major increa se in public investment 
in infrastructure projects, accompanied by private investment in capital goods (housing and shopping 
centres).  Net exports of goods and services became th e main engine of economic growth, expanding 
at an average annual rate of 15 per cent in 2004-2006.2  The economy as a whole grew by 8.1 per cent 
in 2006. 
Table I.2  
GDP growth, measured by expenditure, 2000-2005  
 2000 2001 2002 2003 2004 2005 
Real annual growth rate (%)       
GDP  2.7 0.6 2.2 4.2 7.5 6.9 
Total consumption 0.2 3.9 7.3 7.3 3.9 7.2 
  Private consumption -0.1 3.1 6.9 8.7 4.3 7.6 
  Public consumption 1.8 8.1 9.1 0.4 1.9 4.8 
Gross capital formation -9.3 -24.2 -5.4 19.0 9.9 2.9 
  Gross fixed capital formation -7.3 -25.7 -5.6 23.3 9.4 6.4 
  Variation in stocks -20.8 -13.2 -4.1 -7.0 13.8 -25.2 
Exports of goods and services 18.5 0.3 -2.5 -10.1 18.6 11.6 
Imports of goods and services 10.3 -4.3 0.7 -3.5 14.4 10.8 
Real GDP, composition (%)       
Total consumption 73.8 76.3 80.0 82.4 79.7 79.9 
  Private consumption 61.9 63.5 66.4 69.3 67.2 67.7 
  Public consumption 11.9 12.8 13.6 13.1 12.4 12.2 
Gross capital formation 23.8 18.0 16.6 19.0 19.4 18.6 
  Gross fixed capital formation 20.9 15.5 14.3 16.9 17.2 17.1 
  Change in stocks 2.9 2.5 2.3 2.1 2.2 1.5 
Exports of goods and services 75.5 75.4 71.9 62.0 68.4 71.4 
Imports of goods and services 73.1 69.6 68.5 63.4 67.5 69.9 
Source : Statistics and Census Depa rtment, Office of the Comptroller General of the Republic. 
7. Agriculture, commerce and personal services are the three leading job creators in Panama, 
each of them accounting for roughly 20 per cent of the total working population.  The manufacturing 
sector finds it hard to create new jobs (Table I.1) .  As a result of the economic slowdown in the late 
1990s, open unemployment started to rise and reached a rate of 11.2 per cent in 2001 (Table I.1).  
Since then, however, as the economy has returned to a growth path, employment has revived, 
particularly in the province of Panama, and the open unemployment rate had dropped back to 6.5 per 
cent by 2006. 
                                                      
2 Net exports exclude inputs, re-exports, bank profits on offshore and other operations.  This 
methodology differs from that used in the balance of payments and in Table I.2. WT/TPR/S/186 Trade Policy Review 
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8. The level of underemployment remains relativel y high, however, affecting an estimated 
21 per cent of the employed population.  Informality is also one of the characteristics of the labour 
market:3   household surveys conducted in 2006 show th at about half of the non-agricultural working 
population is employed on an informal basis, mostly in the commerce sector. 
9. Per capita GDP grew at an average real rate of 3.0 per cent in 2000-2006, to reach a nominal 
level of US$5,206 in 2006.  Nonetheless, about 37.2 per cent of the population was still living in 
poverty in 2003 (the last year for which data are available).4  Moreover, major regional inequalities 
persist, as shown by the figures for per capita GDP in 2004 (the latest available per province), which 
ranged from US$7,000 in the provinces of Panama and Colon to just US$2,000 in the rest of the 
country.5  The standard of living index for 2000 (the latest available) also reveals major differences:  
9.1 points in the provinces of Panama and Col on and 22.9 points in the rest of the country.6 
10. A World Bank study shows that Panamanian e ducation levels are among the best in Central 
America, although problems of inequalit y persist in terms of access and quality.7 
11. A report by the International Monetary Fund (IMF) has also identified a problem of 
corruption, which is perceived as a widespread phenomenon affecting the public and private sectors 
alike.8  Nonetheless, the same report acknowledges th e high priority given by the Panamanian 
Government to combating this scourge.  Measur es adopted include the passing of Law No. 6 of 
22 January 2002, issuing regulations for transparen cy in public governance; the creation in 2004 of 
the National Council for Transparency against Corr uption (CNTC);  and ratification in 2005 of the 
United Nations Convention against Corruption.  The main objectives of the CNTC include helping the 
Government to operate in a framework of legalit y and integrity, and to ensure transparent and 
efficient public governance that contributes to sustainable development. 
(ii) Fiscal policy 
12. The Ministry of the Economy and Finance (MEF) is in charge of formulating and executing 
fiscal policy.9  The Fiscal Responsibility Law (LRF) of 200 2 establishes that in no circumstances may 
the fiscal deficit of the non-financial public sector (NFPS) surpass 2 per cent of GDP.10  It also 
establishes the following targets for public borrowing: total net public debt at 50 per cent of GDP, and 
net external debt at 35 per cent of GDP.11  Nonetheless, the legal limits  were breached in 2003, 2004 
and 2005.  According to the IMF, the 2002 LRF l acks institutional sanctions or automatic correction 
mechanisms to ensure its enforcement; it is too ri gid to accommodate recessionary periods; and it fails 
to specify whether or not the Panama Canal Au thority (ACP) is considered part of the NFPS.12  In 
early 2007, the Government was holding internal discussions on a new draft fiscal responsibility law. 
                                                      
3 Statistics and Census Department of the Comptroller General of the Republic. 
4 Ministry of the Economy and Finance. 
5 Data calculated by the WTO Secretariat on the basi s of information obtained from the Office of the 
Comptroller General of the Republic. 
6 Data on the standard of living index can be consulted in UNDP (2002), p. 110;  a high index means a 
lack of basic services and income. 
7 World Bank (2005). 
8 IMF (2005). 
9 Law No. 97 of 21 December 1998. 
10 Law No. 20 of 7 May 2002. 
11 As is the case with net external public debt, net total public debt reduces the balance of State monies 
that form part of the Trust Fund for Development. 
12 IMF (2005) Panama WT/TPR/S/186 
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13. The deterioration of the NFPS financial account s in 2000-2004 partly reflected the policy of 
increasing public expenditure to counteract the recession, which generated an increase in current 
expenditure and interest payments (mainly external) in subsequent fiscal years.  Secondly, the weak 
reaction of tax revenue to changes in GDP, as a result of evasion and tax breaks, meant that revenue 
growth lagged behind the overa ll growth rate in the economy.13 
14. Since 2005, the deficit trend in public finan ces has been reversed, mainly through current 
saving, to which the following factors contributed:  reform of the pension system in 2005, which produced a reduction in the deficit of the Caja de Seguros Social  (CSS) in 2005-2006;  growth in 
transfers from the canal;  the tax reforms in 2002 and 2005 which abolished a number of tax breaks 
and expanded the tax base in several cases;  and the robust growth of the economy in 2004-2006.  
Preliminary data suggest a fiscal surplus of 0.5 per cent of GDP for 2006 (Table I.3). 
Table I.3  
Financial accounts of the non-financial pub lic sector (NFPS), fiscal years 2000-2006  
(Percentage of current GDP) 
 2000 2001 2002 2003 2004 2005 2006a 
I. Total revenues 26.0 25.5 24.3 22.3 21.1 22.4 25.1 
Current revenues  24.3 23.4 22.0 21.0 20.1 20.5 23.7 
Central Government 17.2 16.5 15.4 14.8 13.9 14.7 17.9 
Tax revenues 9.6 9.0 8.9 9.0 8.8 8.9 10.6 
Income tax (ACP)b 0.5 0.5 0.4 0.4 0.4 0.3 0.3 
Import dutyc 2.6 2.2 2.2 2.3 2.3 2.3 2.5 
Other taxes 6.5 6.3 6.3 6.3 6.1 6.2 7.8 
Non-tax revenues 5.5 5.5 6.1 5.6 4.8 5.6 7.3 
Canal toll duties 1.4 1.2 1.2 1.1 1.0 1.2 1.6 
Public services in the Canal area 0.1 0.2 0.3 0.2 0.2 0.1 .. 
Dividends transferred from the ACP 0.3 0.3 0.7 0.9 1.3 1.3 2.0 
Other non-tax revenues 3.7 3.8 3.9 3.4 2.3 3.0 3.7 
Other current incomes 2.1 2.0 0.4 0.2 0.3 0.2 0.1 
Social Security Fund (CSS) 6.4 6.2 5.9 5.6 5.6 5.3 5.2 
Consolidated agenciesd 0.7 0.7 0.7 0.6 0.6 0.5 0.6 
Financial balance of public enterprisese 0.7 0.8 0.8 0.7 0.6 1.0 0.9 
Financial balance of non-consolidated 
agenciesf 0.5 0.6 0.6 0.2 0.2 0.6 0.2 
Capital revenue 0.5 0.7 0.9 0.4 0.2 0.3 0.2 
II. Total expenditure 25.5 26.2 26.2 27.1 26.0 25.6 24.6 
Current expenditure  18.1 18.6 18.7 18.6 18.3 17.4 17.1 
Central government 9.0 9.1 8.9 8.9 9.1 8.7 8.8 
Social Security Fund 7.8 8.3 8.6 8.5 8.1 7.7 7.3 
Consolidated agenciesd 1.3 1.2 1.2 1.2 1.1 1.0 0.9 
Total interest 4.3 4.3 4.1 4.4 4.2 5.2 4.4 
External interest 3.2 3.5 3.6 3.7 3.5 4.4 3.3 
Domestic interest 1.1 0.8 0.5 0.7 0.7 0.8 1.1 
Capital expenditure 3.1 3.3 3.3 4.1 3.5 3.0 3.1 
Current saving 6.2 4.8 3.3 2.4 1. 8 3.1 6.6 
Primary balanceg 4.8 3.6 2.0 -0.4 -0.7 2.0 4.9 
Surplus or deficit 0.5 -0.7 -2.0 -4.8 -4.9 -3.2 0.5 
Memorandum item        
Current GDP (US$ million) 11,620.5 11,870.5 12,272. 4 12,933.2 14, 179.3 15,483.3 17,097.1 
Total public debt (US$ millions) 7, 732.1 8,400.8 8, 521.2 8,661.6 9, 976.8 10,231.3 10,453.0 
Total public debt/GDP 66.5 71.2 69.4 67.0 70.4 66.1 61.1 
Table I.3 (cont'd) 
        
                                                      
13 IMF (2005). WT/TPR/S/186 Trade Policy Review 
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 2000 2001 2002 2003 2004 2005 2006a 
Consolidated domestic public debt/GDPh  11.5 11.7 12.1 12.7 15.1 13.2 12.2 
External public debt/total expor ts 59.6 66.8 74.7 85.9 81.5 73.5 .. 
.. Not available. 
a Preliminary data.  
b Panama Canal Authority. 
c Cumulative ITBMS tariff duties, levied on imports of goods and services. 
d Consolidated agencies: BDA, IMA, BHN,  University of Panama  and IFARHU. 
e Public enterprises:  ETESA, IPAT, AITSA, AMP, AAC, IDAAN and ZLC. 
f Remainder of NFPS decentralized ag encies; includes the balance of the AC P as reported in the 2000-2002 accounts. 
g Total revenue less current and capital expe nditure (excluding interest payments). 
h Pursuant to IMF recommendation, the consolidated domestic public  debt is measured as domestic debt minus the debt of the 
CSS. 
Source : Prepared by the WTO Secretariat on the basis of data from the Office of the Comptroller General and MEF. 
15. The tax reforms of 2002 and 2005 increased the relative importance of a number of taxes in 
total central government revenue.  The transfers ma de by the ACP (22 per cent), and the collection of 
tariff duties and ITBMS14 on imports (14 per cent) continued to account for significant proportions of 
the total central government income in 2006. 
16. It should also be noted that according to an  IMF study, the FTA between Panama and the 
United States (see chapter II(4)( ii)) has the potential to reduce the revenue collected on imports 
(excluding the effects of potential trade deviation) by one fifth, which would be equivalent to a 0.6 per 
cent reduction in GDP per year.15 
17. Total public debt grew considerably between  2000 and 2004, reflecting the public sector's 
additional funding needs and the rise in internationa l interest rates.  Nonetheless, total public debt 
decreased from 66.5 of GDP per cent in 2000 to 61. 1 per cent of GDP in 2006, partly because of an 
improvement in the external debt profile obtained th rough the refinancing operation put into effect in 
late 2005.  External debt accounted for 75 per cent of total public debt in December 2006.  Panama 
has a Stabilization Fund consisting of the proceeds of privatizations, which is worth approximately 
7 per cent of GDP and is largely invested in Panama nian public debt bonds.  In addition, thanks to 
export growth, the ratio of external public debt to exports declined substantially in 2003-2006 
(Table I.3). 
(iii) Monetary policy 
18. Panama has no monetary policy instruments.  It  has no central bank or other institution that 
performs the functions of currency issuance, credit regulation, administration of bank reserves, or 
lender of last resort.16  The banking system is supervised by the Banking Supervisory Authority 
(see chapter IV(5)(iii)). 
19. The United States dollar was adopted as currenc y of legal tender in Panama, on an equal 
footing with the national currency, by the Monetary Convention of 1904.17  The nominal exchange 
rate is still 1:1 between the United States dollar an d the national currency (balboa), which is hardly 
used at all as current money.  The money supply and local interest rates are determined by the bank 
market, in response to supply and demand and interna tional interest rates.  There are no legal reserve 
                                                      
14 ITBMS:  Goods and Services Transfer Tax (a value added tax). 
15 IMF (2005). 
16 The State-owned Banco Nacional de Panamá , serves as the depository of the Government's financial 
resources. 
17 Ministry of the Economy and Finance (2000). Panama WT/TPR/S/186 
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ratios on deposits or any restrictions on fund movements to or from the banking system.  Nor, in 
practice, does there appear to be any restricti on on the establishment of foreign banks in Panama 
(see chapter IV(5)(iii)). 
20. Deposit interest rates are similar to those prev ailing on the international market, particularly 
the LIBOR in US dollars.  Until late 2004, the spr ead between local and international interest rates 
was explained by country risk, which pushed Panama nian rates higher (Table I.4).  Nonetheless, since 
mid-2004, when international rates reversed their do wnward trend and began to rise, local rates have 
stayed below the LIBOR, which is indicative of an excess supply of funds on the local market. 
Table I.4  
Main monetary indicators, 2000-2006  
(Percentages) 
 2000 2001 2002 2003 2004 2005(a) 2006a 
Monetary aggregates          
Total deposits (% of GDP) 77.0 83.0 80.5 79.7 78.4 77.6 .. 
Total deposits (12-month rate of va riation) 8.9 9.5 0.9 4.6 8.6 7.2 .. 
Credit to the private sector  (% of GDP) 93.4 99.4 88.7 85.9 86.3 90.6 .. 
Nominal interest rates        
Interest rate on deposits (Panamanian banks)b 7.1 6.8 5.0 4.0 2.2 2.7 4.5 
Interest rate on deposits (foreign banks)b 5.8 4.2 2.6 2.3 1.9 2.7 4.3 
Interest rate on loans (Panamanian banks)c 10.3 10.6 9.2 8.9 8.2 8.3 8.1 
Interest rate on loans (foreign banks)c 9.5 9.5 7.4 6.1 6.1 6.6 7.5 
Inflation        
Consumer price index (CPI-end period)d 0.7 0.3 1.9 1.5 2.0 3.5 2.3 
Wholesale price index (end period) 8.8 -3.2 -3.0 1.6 4.4 5.7 6.1 
Exchange rate        
Nominal exchange rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 
.. Not available. 
a Preliminary figures. 
b Six-month deposits. 
c One-year loans for commercial activities. d As from 2004, the figures belong to  a new series based on October 2002. 
Source : Statistics and Census Depa rtment, Office of the Comptroller General of the Republic. 
21. In early 2000, foreign banks established in Pa nama were offering inte rest rates on deposits 
and loans that were lower than those offered by Panamanian banks, as a result of the foreign banks' 
greater efficiency and better access to international markets.18  This differential narrowed in 
2000-2006, as the absolute level of interest rates also fell.  On the other hand, the bank spread19  has 
increased during this period, although the figures repor ted in Panama reflect the average of interest 
rates charged on current loans and not the rates on new loans (see chapter IV(5)(iii)). 
22. In 2005, given the rising international oil price and problems with the supply of food 
products, inflation reached a 15-year peak, with a CPI of 3.5 per cent (Table I.4).  Thereafter it 
dropped to 2.3 per cent in 2006, among other reasons  because of the regularization of food supply 
following the opening of new tariff quotas (see chapter IV(2)).20  Nonetheless, the CPI rose again in 
the first four months of 2007. 
                                                      
18 Moreno-Villalaz (1999) and Goldfajn F. (2001). 
19 Difference between the interest rate paid on deposits and that charged on loans. 
20 Ministry of the Economy and Finance (2006). WT/TPR/S/186 Trade Policy Review 
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23. Three factors explain the low inflation traditionally recorded in Panama:  (i) the money 
supply equilibrium resulting from the dollarization regime21;  (ii) the stability of real wages associated 
with the substantial labour surplus that exists becau se of the high level of unemployment (21 per cent) 
and a low activity rate among the population (63 per cent in 2006)22;  (iii) the relative stability of 
international prices, which is mostly passed through to  Panamanian prices thanks to the major role of  
imports in domestic supply. 
24. The consumer price index in Panama has been  below the equivalent index for the United 
States (CPI) throughout the 2000-2006 period, exce pt in 2005, which would suggest a slight but 
continuous devaluation of the real exchange rate (US$/B). 
(iv) Balance of payments 
25. Panama usually records a current account defi cit on the balance of payments, and the gap 
widens in years of rapid economic growth, when goods imports tend to grow faster than exports, 
pushing the deficit higher.  During strong growth y ears, this effect is intensified by an increase in 
profit remittances from foreign trade enterprises opera ting in the Colon Free Zone (ZLC).  In 2004, 
the current account deficit amounted to 7.5 per cent of GDP, but it fell back to 2.2 per cent in 2006 
(Table I.5). 
26. During the period 2000-2006, the current account de ficit has largely been financed by foreign 
direct investment flows.  Moreover current account  imbalances are "automatically" adjusted by 
financial flows, given certain ch aracteristics of the Panamanian economy such as dollarization, the 
absence of controls on capital movements, and financial integration.23 
27. The merchandise trade balance has also traditiona lly been in deficit, partly because of the 
small scale of Panamanian industry and its heav y reliance on imported inputs.  Other factors that 
stimulated the growth of merchandise imports we re the rise in international oil prices and the 
expansion of shopping centres in Panama City, which boosted consumer goods imports.  The ZLC 
made positive contributions to the merchandise trade balance in 2000-2006.  In contrast, the balance 
of trade in services is traditionally in surplus, la rgely as a result of the services provided by the canal 
and tourism (see below). 
Table I.5  
Balance of payments, 2000-2006.  
(US$ million). 
 2000 2001 2002 2003 2004 2005 2006a 
I. Current account -672.5 -170.3 -95.5 -570.3 -1,061.5 -781.6 -378.2 
A. Trade balance -289.3 193.7 -67.0 -4.6 -259.9 99.3 408.8 
Exports 7,832.9 7,985.2 7,592.6 7,581.5 8,816.9 10,735.6 12,412.7 
Goods (f.o.b.) 5,838.5 5,992.4 5,314.7 5,071.9 6,078.3 7,591.2 8,508.8 
Colon Free Zone 4,791.1 4,913.6 4,344.6 4,080.4 4,997.3 5,904.8 .. 
Other sectors 1,047.4 1,078.8 970.1 991.5 1,081.0 1,686.4 .. 
Services 1,994.4 1,992.8 2,277.9 2,509.6 2,738.6 3,144.4 3,903.9 
Imports 8,122.2 7,791.5 7,659.6 7,586.1 9,076.8 10,636.3 12,003.9 
Goods (f.o.b.) 6,981.4 6,688.6 6,349.8 6,274.2 7,616.6 8,907.2 10,309.9 
Table I.5 (cont'd) 
                                                      
21 Chapman, G. (1999). 
22 The activity rate is defined as the economically  active population as a percentage of the total 
population of working age (15 or older).  Consulted at http://www.contraloria.gob.pa/dec/. 
23 Moreno-Villalaz (1999) and Chapman, G. (1999). Panama WT/TPR/S/186 
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 2000 2001 2002 2003 2004 2005 2006a 
Colon Free Zone 4,194.4 4,296.4 3,928.7 3,757.4 4,889.8 5,315.2 .. 
Other sectors 2,787.0 2,392.2 2,422.0 2,516.8 2,726.8 3,592.0 .. 
        Services 1,140.8 1,102.9 1,309.8 1,311.9 1,460.2 1,729.1 1,694.0 
Balance of merchandise trade -1,142.9 -696.2 -1,035.1 -1,202.3 -1,538.3 -1,316.0 -1,801.1 
Balance of trade in services 853.6 889.9 968.1 1,197.7 1,278.4 1,415.3 2,209.9 
B. Net income -560.2 -590.1 -272.3 -821.3 -1,021.2 -1,124.3 -1,044.9 
    Colon Free Zone -151.6 -175.4 -110.3 -128.8 -203.9 -375.8 .. 
External debt service -370.1 -425.4 -437.1 -468.2 -490.7 -566.8 .. 
    Other -91.8 -1.6 275.1 -144.9 -326.6 -181.7 .. 
C. Unilateral transfers 177.0 226.1 243.8 246.4 219.6 243.4 257.9 
II. Capital and financial account -9.7 1,280.4 194.3 -13.5 391.2 1,804.3 718.6 
A. Capital account 1.7 1.6 0.0 0.0 0.0 0.0 0.0 
B. Financial account -11.4 1,278.8 194.3 -13.5 391.2 1,804.3 718.6 
Direct investment 603.4 404.6 98.6 770.8 1,003.9 1,027.0 2,560.0 
Portfolio investment -187.0 -20.6 90.3 109.0 167.2 -706.5 -441.4 
Other investments -427.8 894.8 5.4 -893.3 -779.9 1,483.8 668.9 
III. Errors and omissions 397.5 -462.9 47.2 249.1 274. 9 -347.9 -79.3 
IV. Financing -327.7 644.0 146.0 -267.1 -395.4 674.8 261.1 
Variation in international reserves  -109.2 633.3 137.9 -266.6 -396.3 521.3 166.1 
Other financing -218.5 10.7 8.1 -0.5 0.9 153.5 9.5 
Memorandum item        
Current account/GDP (%) -5.8 -1.4 -0.8 -4.4 -7.5 -5.1 -2.2 
.. Not available. 
a Preliminary figures. 
Source : Statistics and Census Depa rtment, Office of the Comptroller General of the Republic. 
28. The net income account was in deficit in 20 00-2006.  Remittances of profits and dividends 
abroad (mainly by firms based in the ZLC) have increased.  Interest payments on the external debt 
have continued to be the main cause of the deficit on this account (50 per cent of the total in 2005).  
Unilateral transfers were always positive during the period.  
29. Except for 2000 and 2003, the capital and fina ncial accounts were in surplus every year 
between 2000 and 2006.  In the case of Panama, varia tions in international reserves represent changes 
in the external asset position of Banco Nacional de Panamá . 
(3) TRADE AND INVESTMENT FLOWS  
(i) Trend of merchandise trade 
30. The composition and direction of Panama's me rchandise trade are shown in Tables AI.1 to 
AI.4, although the figures exclude the vast majo rity of ZLC operations, which account for roughly 
three quarters of the value of Panama's total goods  trade (imports and exports).  The tables and 
analysis presented in this section therefore do not include imports from other countries to the ZLC, or 
exports or re-exports from the ZLC to other c ountries.  Nonetheless, Table AI.3 includes sales 
(exports) made from Panamanian customs territory to  the ZLC and other Panamanian duty free zones, 
while Table AI.4 shows purchases (imports) made fro m that territory to all Panamanian duty free 
zones. WT/TPR/S/186 Trade Policy Review 
Page 10 
 
 
31. The value of merchandise imports grew at an  annual average rate of 4.2 per cent between 
2000 and 2005, while exports growth averaged 4.5 per cent per year, both series fluctuating slightly during the 2001-2002 biennium.  In 2005, imports and exports amounted to US$4.155 billion and 
US$964 million, respectively. 
(a) Composition of merchandise trade 
32. Panama mainly exports food products, such as various fruits (mainly fresh melon, watermelon 
and papaya);  fresh, frozen, dried or filleted fish;  ba nanas;  and frozen crustaceans.  In 2000-2005, the 
share of the various fruits grew more than sevenfo ld, the share of different types of fish doubled, 
while that of bananas fell by half (Table AI.1).   Fuel exports virtually disappeared following the 
closure of the country's single oil refinery in late 2002.  The share of manufactured goods in total 
exports, on the other hand, has fallen considerably:  after reaching a peak of  nearly 18 per cent in 
2001, they slumped to 9.1 per cent of total exports  in 2005.  The drop affected exports of chemicals 
and semi-manufactured products, such as leathe r goods and wood pulp articles, in particular. 
33. With regard to Panama's imports, the share of  manufactures remained stable at around 68 per 
cent during 2000-2005 (Table AI.2).  The main categories of imported manufactures are chemical 
products (medicines), telecommunications equipment and motor vehicles.  The share of agricultural 
imports remained broadly stable in 2000-2005, re presenting 13 per cent of imports in 2005.  Fuel 
accounted for 17.9 per cent of total imports in 2005. 
(b) Direction of merchandise trade 
34. Although its share of Panama's imports has dec lined significantly, especially since 2003, the 
United States remains the leading source of the co untry's imports, accounting for 27.5 per cent of the 
total (Table AI.3).  The next most important import sources are the Netherlands Antilles, the European Union and Costa Rica.
24  China and Brazil have also seen their shares increase considerably 
since 2001. 
35. The United States is also the main destination for Panamanian exports, absorbing 45 per cent 
of the total in 2005 (Table A.I.4).  The Europ ean Union's share has grown significantly since 2001, 
rising to 28.2 per cent in 2005.  In contrast, e xports to Latin American countries have declined, 
particularly since 2003, but continue to represent a si gnificant 19.3 per cent of the total.  It should be 
noted that re-exports from the ZLC are mo stly sent to Latin American countries.25 
(ii) Trade in services 
36. Panama's trade in services is traditionally in su rplus.  Service exports represent roughly 29 per 
cent of Panamanian GDP and 81 per cent of net export s of goods and services (Table I.6).  In 2006, 
transport and storage services (including those pr ovided by the ACP and by firms from the ZLC) 
accounted for just over half of all service expor ts.  Exports of tourism services (24.6 per cent), 
financial services (6.8 per cent), and other business services (6.7 per cent) were also important. 
                                                      
24 Since 2004, Panama has imported a large proportion of its consumption of fuels and other petroleum 
products from the Netherlands Antilles. 
25 See:  http://www.zonalibredecolon.com.pa/main.htm. Panama WT/TPR/S/186 
 Page 11 
 
 
Table I.6  
Trade in services, 2000-2006  
(US$ million) 
 2000 2001 2002 2003 2004 2005a 2006a 
Balance of trade in services 853.6 889.9 968.1 1,197.7 1,278.4 1,415.3 2.209.9 
Services imports -1,140.8 -1,102.9 -1,309.8 -1,311.9 -1,460.2 -1,729.1 -1,694.0 
Services exports 1,994.4 1,992.8 2,277.9 2,509.6 2,738.6 3,144.4 3,903.9 
Panama Canal Authority 756.7 739.1 806.1 930.9 1,054.9 1,234.1 .. 
Colon Free Zone  55.0 44.9 71.0 47.1 61.6 79.2 .. 
Other transport services and  storage 340.9 347.3 332.4 375.6 402.1 462.3 2,210.7b 
Tourism services 457.8 477.1 513.0 584.6 651.0 779.8 960.0 
Financial services 140.5 126.6 271.0 292.8 240.0 197.4 267.4 
Insurance services 38.8 31.4 26.6 27.6 32.6 34.0 34.7 
Communications and construction serv ices 33.7 43.9 37.3 46.6 53.6 65.5 104.5 
Information technology services 0.0 0.0 0.0 0.0 14.4 17.9 21.1 
Other business services 138.0 148.0 183.9 167.8 193.0 236.0 262.6 
Government services 33.0 34.5 36.6 36.6 35.4 38.2 42.9 
.. Not available. 
a Preliminary figures. 
b Includes services provided by the ACP and by firms from the ZLC. 
Source : Statistics and Census Depa rtment, Office of the Comptroller General of the Republic. 
(iii) Foreign investment 
37. The net flow of foreign direct investment (FDI) quadrupled between 2000 and 2006, reaching 
a level of US$2.56 billion in 2006. 
38. FDI flows in Panama grew significantly in the late  1990s with the privatization of firms in the 
electric power and telecommunications sectors.  Th en, between 2000 and 2002 , they faltered sharply 
as a result of weak economic growth and low levels of profitability in the banking sector.  Since then, 
net FDI flows have again e xpanded rapidly (Table I.7). 
Table I.7  
Flows of foreign direct investment by sector, 2000-2006  
(US$ million) 
 2000 2001 2002 2003 2004a 2005a 2006a 
Banking sector 154.5 -81.7 -187.3 350.6 405.7 280.3 1,636.1 
Firms in the Colon Free Zone  -38.5 26.6 7.2 78.7 190.8 440.9 383.9 
Transport, storage and communications sector 
(excluding ZLC) 173.4 68.8 43.3 114.7 271.3 .. .. 
Wholesale and retail trade 95.4 78.2 152.5 56.6 78.0 .. .. 
Other sectors 239.1 375.2 82.9 216.9 58.1 305.8 540.0 
Total 623.9 467.1 98.6 817.5 1,003.9 1,027.0 2,560.0 
a Preliminary figures. 
Source : Statistics and Census Depa rtment, Office of the Comptroller General of the Republic. 
39. The relative shares of FDI received by the di fferent sectors began to change in 2003 as the 
new economic growth cycle took hold.  In recent y ears, FDI has been undertaken particularly by ZLC 
user enterprises, by other enterprises in the tran sport and storage sector and by call centre service 
providers.  Increasing amounts of FDI have flowed in to the banking sector in response to the granting 
of new licences and the acquisition of national banks  by foreign groups (e.g. the purchase of Banistmo 
by HSBC for US$770 million in 2006).  It is also worth mentioning the significant foreign share in 
new real estate projects since 2005. WT/TPR/S/186 Trade Policy Review 
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(4) PROSPECTS  
40. The 2006 Annual Economic Report published by the MEF projected real GDP growth of 
8.0 per cent per year in 2007-2009, based mainly on mega-scale construction projects, in particular a third set of locks in the Canal ( see chapter IV(5)(v)).  The current acc ount deficit is also projected to 
widen substantially, reflecting the imported inputs needed for those constructions.  The same report 
anticipates a favourable international climate for Pana manian exports and traffic through the Canal, as 
well as stabilization of the oil price, which w ould allow domestic expenditure to grow without 
generating inflationary pressures.  In a document entitled Visión Estratégica para el Desarrollo 
Económico y de Empleo hacia el 2009 , published in 2005, the Government proposes a central 
government fiscal surplus of 1 per cent of GDP and st abilization of the total public debt/GDP ratio at 
60 per cent, as targets for 2009.
26 
                                                      
26 See:  http://www.mef.gob.pa/.