Panamanians march through the streets of Panama City, Panama to protest possible privatization of the social security fund, Wednesday, March 16, 2005.
Since taking office in 1994, President Ernesto Perez Balladares has relaxed labor controls, reduced government regulation of business, and sold off major public enterprises. These actions aimed to reduce spending on state-run industries and payrolls, curb the power of unions, and encourage private enterprise and investment, in hopes of revitalizing the economy.
The downturn of Panama’s economy, which started in 1999, modestly reversed itself at the start of 2003. (The sectors of Panama’s economy that have suffered in 2002 were manufacturing and construction, traditional agriculture, retail sales, fishing, and the exports sector.)
Panama still struggles to overcome the departure of the US military, low prices for its primary exports, higher prices for petroleum imports, reduced trade and investment due to the regional and worldwide economic slowdown, and contraction of domestic demand.
About Privatization in Panama
Traditionally, Panama has maintained a rather liberal regime for foreign investment and investment in financial instruments. The government and the Panamanian business community actively encourage foreign direct investment (FDI). Laws in general make no distinction between domestic and foreign companies. In 1998, the GOP enacted the Investment Stability Law, which, among other things, guarantees foreign investors, who invest at least two million dollars in Panama, equal treatment under the law to that of their domestic competition.
The Panamanian Vice Ministry of Foreign Trade (VICOMEX) is the principal entity responsible for promoting foreign investment. It provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama. However, depending on the character of the planned investment, several different governmental entities may have a passive or active interest in the investment in terms of setting its parameters of operation, particularly within relevant regulations, land use, employment, special investment incentives, business licensing, etc. There is no formal investment screening process by the GOP, although the government does tend to monitor large foreign investments.
The GOP does impose some limitations on foreign ownership, such as in the retail and media sectors where ownership must be Panamanian. Foreign retailers, however, have been able to work within the confines of Panamanian law primarily through franchise arrangements. Some professions, such as medical practitioners, lawyers, and custom brokers, are reserved for Panamanian citizens. The GOP also requires foreigners in various sectors to obtain from the government explicit permission to work, but to Embassy’s knowledge these restrictions have not hindered U.S. firms operating in Panama. The U.S. government is seeking to achieve meaningful market openings for the provision of services within the context of the ongoing free trade negotiations.
There is no de jure discrimination against U.S. or other foreign investors in most sectors. A domestic investment protection law was enacted in 1999 and remains in force; however, it has not yet been invoked or used in contravention of U.S. investment. There is a constitutional prohibition against foreign land ownership within ten kilometers of the national border or on an island. Neither Panamanian citizens nor foreigners may own beaches or the shores of rivers or lakes. Builders and investors generally rent such lands for 20-30 years, via the Ministry of Economy and Finance. The tourism incentive law expands this period for up to 40 years.
Panama experienced a boom in foreign investment between 1996 and 1998 as a result of former President Balladares’s privatization and modernization program. Foreigners, including U.S. firms, participated actively and successfully in the privatizations. The conduct of major public bids and tenders for other public sector projects has raised greater concerns about the openness and transparency of the process and the responsiveness of authorities to participants. U.S. companies have complained that some bids lack transparency.
The Panamanian government has refrained from tendering the few remaining GOP state enterprises, especially for “Atlapa”, Panama’s primary convention center and the largest such facility within Central America. The international airport had been scheduled for privatization in 1999, but has since been “corporatized” as a private entity with all shares owned by the GOP. The government has also pledged not to privatize its inefficient water and sewage utility, its electric transmission company, or the Caja de Seguro Social (Social Security System).
Panama’s privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria.
Following the privatizations, Panama experienced a dramatic drop-off in FDI. FDI in 2002 was only US$98.6 million primarily as a result of losses by major banks and the drop-off in privatizations. However, Foreign Direct Investment increased dramatically in 2003, ending at US$791.5 million as a result of major investments in the energy and construction as well as resurgences in the banking sector.
A major challenge for the Panamanian government has been the development and productive use of the U.S. military properties transferred to Panama by the United States from 1979 until December 1999. The Interoceanic Region Authority (ARI) is the Panamanian institution responsible for developing or selling the reverted areas. Its mandate will end on December 31, 2005. The commuter airport development at the former Albrook Airfield has been one of the most successful ventures. Another growing concern and one of the largest U.S. investments, the former Arraijan fuel tank farm and marine terminal at the former Rodman Naval Station, started by an Exxon-Mobil partnership with the Saudi Alireza Company, was recently sold to an Argentine investor. Other projects now underway include major tourist projects at the former Fort Amador on the Pacific and former Fort Sherman as well as a fashion center and a museum of ecology being designed by world-renowned architect Frank Ghery. On the former Howard Air Base, Dell Corporation opened a customer service call center in August 2003 that has the capacity to employ 900 people. Progress in the academic and research community (City of Knowledge) has been slow but steady. Several U.S. universities have located campuses in various former military installations; some international and regional organizations have set up offices at the City of Knowledge. Smaller developments, such as housing, remain vacant, as the ARI has focused almost solely on large, public projects.
Panamanian Law forbids monopolistic and anti-competitive behavior. The Government of Panama passed in February 1996 an Antimonopoly Law, designed to prevent monopolistic practices and create a consumer protection authority. Consumers are protected by the theoretically autonomous CLICAC (Free Competition and Consumer Affairs Commission), which has instituted fines for practices ranging from selling expired products to price gouging. The agency is for the most part active, yet remains under-funded and, like most GOP entities, in the past has received low marks in a survey of general public perceptions regarding its effectiveness. At times, CLICAC has begun investigations under pressure from interest groups, but there is no indication that its conclusions were tainted.
About Panama Economy
Since colonial times, Panama’s location has made it a crossroads for trade and transit. This role assumed worldwide significance in the 20th century with the completion of the Panama Canal, which dominated Panama’s economy for decades and tied it closely to the United States.
Panama’s GDP was $9.89 billion in 2000, equal to $3,460 per person. Commerce, finance, and business services constituted the core of Panama’s economy, contributing 76 percent of the GDP. Most economic activity was concentrated in the urban area of central Panama surrounding the canal.
In the 1990s the rural economy accounted for 10 percent of the GDP and was primarily agricultural, producing farm and ranch commodities. Spending by the United States on military bases added another 5 percent, or $366 million, to the GDP, but that ended when Panama assumed control of the canal in 1999.
Business related to the Panama Canal plays a major role in this sector, but its importance has declined as the economy has become more diverse. International banking, maritime services, manufacturing, and shipping combine to provide more jobs and tax revenue than the canal. Economic growth planned in the late 1990s was expected to further reduce the country’s dependence on canal-related business.
The economy suffered a serious decline in the late 1980s, when the United States imposed a series of restrictions on trade and financial dealings with Panama and eventually invaded the country to overthrow the government of Manuel Noriega. The embargo caused a sharp drop in the GDP and higher unemployment. It also hurt tourism, manufacturing, and commerce, and made it difficult to maintain roads, power utilities, and communication equipment. Since the 1989 invasion the GDP has grown substantially, fueled by U.S. reconstruction funds, an end to the embargo, restored international credit, and the return of investor confidence.
A major factor in Panama’s industry and foreign commerce is the Colon Free Zone, an international trade facility that allows businesses to operate without paying import duties or taxes. Established in 1948 near the northern terminus of the canal, this zone is the largest of its kind in the Western Hemisphere and second only to Hong Kong in the world. In 1995 its 1,600 businesses generated $11 billion in sales and employed 14,000 people. Companies in the zone import raw materials and other components for manufacturing, or operate warehouses that break down large shipments from Asia and distribute them in nations bordering the Atlantic. In the 1990s the free zone doubled its area and has benefited from new container ports at Manzanillo and Coco Solo.
Since the 1970s, when it borrowed large sums for social and economic programs, Panama has had one of the highest levels of debt per capita in the world. In 1995 the nation’s foreign debt was $7 billion, or $2,600 per person, much of it overdue. In 1996 the government settled outstanding commercial debt claims against Panama through negotiations, reducing pressure on the government and allowing it to seek new credit. However, payments on the debt were the largest government expenditure in 1995, taking 28 percent of the $1.9 billion budget.
Despite its small population and area (3.2 million and 30,193 square miles, respectively), Panama is an important center for international trade in the Western Hemisphere, as both a major shipping thoroughfare and a regional economic power. Since 1992, an average of 185 million long tons of cargo has passed annually through the Panama Canal. Panama is also a financial and communications hub that sits at the crossroads of five international fiber-optic networks and hosts 110 international banks.
The Panamanian economy is one of Latin America’s most stable, with the Panamanian Balboa being pegged to the dollar since 1903. Panama’s Colon Free Trade Zone (CFZ), established in 1953, is the largest in the Western Hemisphere and contributes substantially to the country’s economy. The CFZ allows all goods, except firearms and petroleum products, to be imported, stored, modified, repacked, and re-exported without being subject to any customs regulations. Although the country has consistently maintained one of Central America’s highest per capita gross domestic products, there is a high level of income inequality, with a significant portion of the population living below the poverty line.
Panama’s reliance on the Panama Canal, shipping and port services not only makes Panama’s economy highly dependent on world trade and economic trends. The global downturn in 2001 and in 2002 slowed the growth rate of the country’s economy considerably, which had enjoyed an annual average real domestic product growth (GDP) of 5.1% through the 1990s. In 2002, canal transits and tonnage, for example, declined 2.3% and 2.8% respectively, over 2001. Activity at the Colon Free Trade Zone decreased, along with export tonnage of some Panama’s major export commodities, for example, bananas (-5.2%) and shrimp (-16.5%). Overall, Panama’s real GDP growth rate slowed from 2.7% in 2000 to only 0.6% in 2001. In 2002, the economy began to recover slightly, with a growth rate of 2.2%. In 2003, a stronger global economy helped Panama post a growth rate of 4.1%, the highest since 1998. In the first half of 2004, Panama’s economy has remained robust, boosted by increased canal traffic, tourism spending and investment, and Colon free-trade zone activity.
On May 2, 2004, Martin Torrijos, son of the late former president Omar Torrijos, was elected president of Panama. President Torrijos was sworn in on September 1, 2004.