Panama's economy: paid in dollars it does not print

Why Panama mints coins and prints no banknotes

The balboa replaced the Colombian peso in 1904, the year after the republic separated from Colombia, and it has been fixed at one to one with the United States dollar since independence in 1903. Secession had left the new state briefly without a currency of its own, and it adopted the dollar as legal tender at the same time. The balboa exists, but only in metal. Panama issues coins, and Britannica records that United States paper currency circulates freely beside them, while United States coins are widely used too.

The one exception lasted a week. In 1941 the government of Arnulfo Arias printed balboa banknotes and recalled them several days later, which gave them the name "the Seven Day Dollars". The government that followed burned them. Those notes are the only ones Panama has ever issued, and the few that survived turn up now in collections.

What a borrowed currency removes is the central bank. Panama has none to act as a lender of last resort, and its banks are run conservatively because of it: their average capital adequacy ratio was 15.6% in 2012, nearly double the legal minimum. Supervision began in 1970 with the National Banking Commission, which was restructured in 1998 as the Superintendency of Banks with financial and administrative autonomy.

What it gives back is price stability. Inflation measured 2.0% in 2006 according to the Economic Commission for Latin America and the Caribbean, and consumer prices fell 0.2% in the year to December 2024. By May 2025 the annual rate had reached minus 0.7%, in the IMF's figures.

The cost showed once, and it showed sharply. When the United States moved against Manuel Noriega in the late 1980s, its sanctions froze Panamanian assets held in the United States, and because Panama used the dollar it had no means of replacing them. It defaulted on its IMF debt in 1987. A general strike followed and the banking system closed for two months. The United States invaded in 1989, and Panama regained access to IMF funds in 1992. The episode shows what dollarisation leaves a government unable to do, and Panama: history covers the politics behind it.

How the isthmus crossing paid before the canal

Panama's location has been its income since the early 16th century. From the earliest Spanish years, ports on each coast and a trail between them handled much of Spain's colonial trade. Silver mined in Peru was landed on the Pacific side and carried overland to Portobelo or Nombre de Dios for shipment to Europe, and the port towns lived on the traffic. When colonial exchange across the isthmus declined in the 18th century, the economy stagnated with it.

The California Gold Rush brought the next boom. Cargo and passengers bound for California crossed the isthmus in rising numbers from 1848, and a United States company completed a railway of 79 kilometres between Colón and Panama City in 1855. It carried the economy for about fifteen years, until the first transcontinental railroad in the United States drew the traffic away.

The French canal attempt of the 1880s and the American construction that followed both put money into the isthmus. The United States opened the canal in 1914, having paid the new republic US$10 million in 1904 and US$250,000 in each year after. Britannica records that the annuity was raised under a protocol of 1936, after the Depression and the American departure from the gold standard, and raised again in 1953.

The pattern since then has been one of dependence on world trade. The depression of the 1930s cut canal traffic and sent unemployed workers from the terminal cities back to subsistence farming. The Second World War left canal traffic flat but filled the canal cities with spending by United States forces and the convoy system. Another slump followed the war, and then came a long expansion between 1950 and 1970, when banking, tourism and the sale of services to the Canal Zone grew quickly. The Canal Zone itself, a strip 16 kilometres wide, was abolished in 1979.

What the canal pays into Panama's treasury

Panama has run the canal through the Panama Canal Authority since noon on 31 December 1999, and the authority reports on a fiscal year running from October to September. Its revenue for fiscal 2025 reached B/.5,705 million, 14.4% above the B/.4,986 million of fiscal 2024. Net profit was B/.4,134 million, B/.372 million above budget and B/.695 million more than the year before.

Of the 13,404 transits in fiscal 2025, 3,342 were Neopanamax ships using the new locks and 10,062 were Panamax ships using the old ones. The authority names containers and liquefied petroleum gas as the segments that drove the year, with bulk carriers still recovering and liquefied natural gas below expectations. It credits at least B/.100 million of the result to frontloading, the advance distribution of cargo, and says its long-term slot allocation programme partly offset the fall in gas carriers.

The canal accounted for 7.7% of Panama's GDP in 2025, and dividends from it provided at least 20% of government revenue.

How the Panama Canal prices a transit

Tolls are set by the authority and depend on the type of vessel, its size and its cargo. For container ships the charge is levied on capacity: from 1 April 2016 it moved from US$74 per loaded container to US$60 per twenty-foot equivalent unit of capacity plus US$30 per loaded container, and a Panamax container ship carries up to 4,400 such units. Most other vessels paid by volume in fiscal 2016, at US$5.25 per ton for the first 10,000 tons, US$5.14 for the next 10,000 and US$5.06 after that, a canal ton being 100 cubic feet.

Passage can also be bought ahead of the queue. In August 2006 the Panamax tanker Erikoussa paid US$220,300 at auction to pass a queue of 90 ships during maintenance at the Gatun Locks, against a normal fee of US$13,430. In August 2026, with transits restricted by drought, SK Gas paid US$5.3 million for priority passage for the liquefied petroleum gas tanker G. Spirit. The cruise ship Norwegian Pearl paid a regular toll of US$375,600 in April 2010. Richard Halliburton paid 36 cents to swim the canal in 1928.

What expansion and drought did to canal income

The expansion began in 2007 and opened to commercial traffic on 26 June 2016, with two new flights of locks giving the canal a maximum sustainable capacity of about 600 million PC/UMS tons a year. In its first decade after the handover the authority had invested nearly US$1 billion widening and modernising the old canal.

What limits the income now is rain. Every lockage spends fresh water from Gatun Lake, and the same reservoirs supply more than half of Panama's population. In normal times 36 ships a day can transit; in early December 2023, after the driest October since records began 73 years earlier, only 22 could. The canal returned to full capacity in September 2024, so fiscal 2025, which began in October 2024, was its first full year back. In September 2026, with an El Niño intensifying, the authority cut the daily limit to 34 ships from 3 September and to 32 from 15 September. The World Bank counts El Niño among the risks to canal revenue, and Panama: geography covers the water itself.

How Colón's free zone earns from passing goods

The Colón Free Zone was established in the mid-20th century at the Atlantic end of the canal. It is a free port, and Britannica describes it as a manufacturing, warehousing and re-export centre of several hundred factories, drawing raw materials and semi-finished goods from Hong Kong, the United States, Japan, Italy and South Korea and sending finished goods largely to Colombia, Ecuador and Brazil.

The zone recorded a total movement of goods worth US$24.7 billion in 2024. Its own administration reports that its imports that year came principally from China, the United States, Belgium, Mexico and France, and that its re-exports went principally to Venezuela, Panama itself, Costa Rica, Guatemala and Colombia. Costume jewellery and other goods of pearls, stones and precious metals led the imports, followed by cigarettes and cigars and then toys. Raw materials for making medicines led the re-exports, ahead of clothing and electrical machinery.

The zone also sells to people who travel to it. Shopping visitors rose from 52,364 in 2023 to 65,659 in 2024, with 20,591 from Ecuador and 18,237 from Cuba. Nineteen new companies set up there in 2024, investing more than US$24 million, and the administration reports a contribution of B/.29,236,147 to the central government for the year.

The zone's weight in the national accounts swings with regional demand. The IMF puts its net exports at minus 4.3% of GDP in 2023 and plus 2.4% in 2024. The national statistics institute recorded that commercial activity in the zone fell in the first quarter of 2025, while the canal, the ports and air transport grew. A reform passed in February 2005 added a 1% levy on firms operating there.

Why offshore banks settled in Panama City

In 1970 the government began promoting offshore banking by making international transactions tax-exempt and removing other regulation, and foreign capital arrived in large amounts. Several major Latin American, North American and European banks opened branches in Panama City. The sector had grown up providing trade finance for cargo passing through the canal; under Noriega it also became a channel for laundering drug money.

The tax system explains much of the draw. Taxation under Panama's Fiscal Code is territorial: only income from business carried on in Panama is taxed, a sales office in Panama does not by itself create a tax liability if the underlying transactions happen elsewhere, and dividends paid from such untaxed earnings are free of tax. The corporate rate is 25% and the highest marginal income tax rate is 27%. The standard value added tax is 7%, raised from 5% by the government elected in May 2009. The Bertelsmann Transformation Index notes that funds may move in and out of the country without restriction, and that transactions above US$10,000 must be declared.

That combination built the reputation. In April 2016 more than 11 million documents allegedly leaked from the Panamanian law firm Mossack Fonseca, quickly dubbed the Panama Papers, showed how 12 current or former world leaders and dozens of other politicians, officials and celebrities had used tax havens to hide their wealth. Panama had signed a treaty on exchanging financial information with the United States in April 2011 and had left the Financial Action Task Force grey list in February 2016; the European Union removed it from its tax haven blacklist in 2018.

The IMF, reviewing the system in August 2025, found the banks sound, well capitalised and liquid, and asked for a better framework for resolving a failed bank. It also welcomed the authorities' consideration of a financial safety net.

What Panama digs and grows for export

The goods economy is small beside the transit economy, and for a few years one mine made it much larger. Copper ore became Panama's main export, worth US$3 billion in 2022. The Cobre Panamá mine was operated by Minera Panamá, of First Quantum Minerals. The IMF estimates that the mine accounted directly and indirectly for about 5% of GDP and 2% of employment.

Why the copper mine closed

The National Assembly approved a renewal of the mining contract in 2023, and in October and November of that year the renewal set off mass protests. The Bertelsmann Transformation Index records three grievances among the demonstrators: the likely environmental damage, corruption around the contract's approval and the idea of a new foreign enclave. The Supreme Court ruled that the contract violated the constitution on 25 grounds, and the mine closed. Economic growth slowed from 7.3% in 2023 to 2.9% in 2024, mainly because of the closure, and unemployment rose from 7.4% in August 2023 to 9.5% in October 2024. The IMF counted the negotiations over the mine's future among the possible upsides in its August 2025 review.

What the farms and fisheries sell

Without copper, the export list is food. Bananas made up 13.8% of goods exports in the Bertelsmann index's 2024 figures, frozen shrimp 8.3%, raw cane sugar 7.9% and fish fats and oils 6.7%, and the ten leading products together 58.9%. Panama exported about 3,000 tonnes of coffee in 2023, mostly to the United States. The main markets in 2024 were the United States, the Netherlands and Taiwan.

The sums are modest. Goods exports for the first eight months of 2024 came to PAB 860.6 million. Of that, PAB 223.2 million came from the special regimes of the free zones and the Panama Pacifico economic area, a category that grew 21% on the same months of 2023. Food moves the other way in larger volume: between January and September 2024 Panama received about 47,453 containers of food and feed, 25,176 of them from the United States, carrying yellow corn, soybean meal and rice among much else.

Where Panama's growth has not reached

The growth has been fast. Real GDP rose by an average of more than 10.4% a year from 2006 to 2008, with 11.5% in 2007, and the World Bank measured 4.4% in 2025. The national statistics institute put first-quarter GDP in 2025 at B/.21,449.4 million, 5.2% above a year earlier. GDP for 2025 came to about US$90.4 billion, or about US$19,800 a head, for a population the record puts at 4,570,133 in 2025.

Poverty fell with it, from 48.2% in 1991 to 12.9% in 2023 on the World Bank's measure. The country's own Ministry of Economy and Finance counted 21.7% of the population poor and 9.6% extremely poor in 2023. Its figures show where the growth stopped: poverty stood at 44.7% in rural areas and 9.6% in towns, and the World Bank puts it at 76% in the Indigenous comarcas. The Human Development Report 2023 to 2024 gave Panama a score of 0.820, and some Indigenous districts much less; Besiko scored 0.331.

The Gini coefficient was 48.9 in 2023, down from 50.9 in 2021. Work outside the transit economy is often informal: 49.3% of the workforce was in the informal sector in October 2024, up from 47.4% in 2023. The Bertelsmann index describes a labour force poorly educated on average except in enclaves such as the canal, and it notes that the constitution reserves retail trade to Panamanian citizens and companies, with at least 49 professions closed to foreigners. By law every worker receives an extra month's pay each year, the décimo tercer mes.

How Panama's budget carries the weight of dollarisation

With no currency to manage, the budget is the government's one large instrument, and in 2024 it slipped. The IMF measured a deficit of 7.4% of GDP for the non-financial public sector excluding the canal, up from a revised 3.9% in 2023, though it judged the underlying deterioration at 0.8 percentage points once one-off factors and accounting changes were removed. The World Bank, counting differently, puts the deficit at 6.2% in 2024, 3.7% in 2025 and an estimated 3.5% in 2026.

Debt followed the same path. Public debt was US$42.94 billion in 2023, or 52.39% of GDP, according to the Bertelsmann index, and the World Bank puts it at 65.6% of GDP in 2025. The revised Social and Fiscal Responsibility Law sets a deficit of 2% of GDP by 2029 as the target, and the IMF judged that path appropriate in August 2025.

The rating is what is at stake. Panama's government debt reached investment grade in February 2010, and the IMF names losing it among the downside risks. The pension system, founded in 1941 and financed by employer and worker contributions, is the other strain: the government proposed raising the retirement age and employer contributions, and unions and civil society groups opposed it. The IMF called the pension reform a welcome adjustment in August 2025 and said further changes would be needed for long-term sustainability.