Panama Economy & Banking

Introduction – What we are going to do here is give you a look at the Panama economy with an eye towards the banking system in Panama.

Panama Dollarization – Panama is unique as far as tax havens go because it has no currency of its own, instead using the dollar. Panama calls its currency the Balboa but actually prints no Balboas. The Balboa is pegged at a one to one value ratio to the US dollar. Panama does mint its own coins. The coins match the USA coins in value, size color, and shape. The reason for this is it is expensive to transport a lot of coins into the country and tourists certainly will not bring an ample supply.

Panama Dollarization Stability – The dollarization policy has given Panama a sense of economic stability that most of its neighbors lack. The only other country to use the dollar is Ecuador. Since Ecuador is not even close to being an offshore banking and tax haven or a retirement haven we will consider Ecuador beyond the scope of this article.

The lack of an in house printed currency backed by nothing more than the good faith of the government has spared Panama a lot of economic problems that its neighbors have experienced over the years. Panama has been using the US Dollar as its currency for over 100 years now. In essence Panama has what could be called a private monetary system versus a governmental one. In the existing Panama structure the stock of money is controlled by private banks and agents. This system Panama uses eradicates the risk of foreign exchange losses due to speculative fluctuations, currency mismatches and aggressive speculator attacks to manipulate exchange market prices for short term gain.

Panama’s Lack of a Central Bank - The National Bank of Panama also called in Spanish Banco Nacional de Panama, was started in 1904. Banco Nacional de Panama is the official Panama Bank but it is not a central bank and that being the case it also engages in general banking business with retail and commercial customers. They service the working folks in Panama who could not meet the minimum deposit requirement for the other banks. They as a rule do not open accounts for foreigners not having residence in Panama.

Panama’s banks are controlled by the National Banking Commission which is called in Spanish Comisión Bancaria Nacional and they do not maintain any sort of bank being just a regulatory agency. Lacking a central bank like the Federal Reserve System in the USA, or Bank of England in the UK means there is far less debt for the country. In the countries with a central bank the country typically prints money in their own mint but borrows the money as a computer entry from the central bank of course paying the central bank interest for this money that they themselves have printed. This interest is of course a part of the national debt and this is expected to be paid back by the constituents of the country generally in the form of taxes so it is a hidden tax. It would be beyond the scope of this article to get into why a country should or should not just print its own money and eliminate the central banks saving all this interest. It is also curious that these central banks are typically privately owned so the interest paid goes into the pockets of private bankers instead of the government or the people themselves.

When there is a central bank the people get to absorb the losses from any bank failures since it is the central bank that steps in and does miraculous bookkeeping to correct the imbalance or to make for a happy merger of a failing bank with a healthy one. When there is a government controlled bank insurance agency like the FDIC the people again get to pay for bank failures through government subsidizing these insurance companies if things really get bad. It is these insurance programs for banks that inspire unsound banking. If your losses were going to be covered anyway why practice sound banking? For the purposes of this article it is worthwhile noting that Panama lacks a central bank and thus the residents are free from paying interest to a central bank that is good enough to do the banking for the country in return for interest payments which can be a heavy load on the people.

Of course a country using gold or silver coins would be the best, next best would be a fully backed gold or silver backed paper money, next would be fractionally backed currency but all of the countries of the world have done away with such currency at this time. So one could argue that the next best thing would be the dollarization because there is no central bank collecting interest payments from the Panamanians, the Americans are good enough to provide this service. This allows Panama a great deal of stability and leaves the population very free of taxation.

All offshore derived income is not taxed. There is no capital gains tax on bank interest; there is a true duty free zone in Colon. The Panamanians do not have income tax on the first $9,000 of income and the average wage is $300 a month, the people have a realistic workable government run health care system, education system etc. In summation the absence of a central bank in Panama has the effect of preventing the government from monetizing it’s deficits as is the case with the Federal Reserve System thus forcing the government to follow hard budgetary restraints when it comes to spending.

Panama No Foreign Loans - When a country goes Dollarization they tend to not get into the foreign aid business. Where would they get the money from anyway? A country that prints money borrowed from the central bank can get into foreign loans aggressively. They can do these through their member banks or on a governmental level. This is great for business if you are a private banker in the central bank and it sort of stinks if you are a citizen since it is your tax bill being run up in the form of interest on this aid or these loans. Panama does not engage in making such loans, grants etc.

Panama Military Free – Panama has no military thus no military spending with its resultant deficits. Panama does not go to the central bank and issue money to go conduct wars and police actions in foreign lands. Panama does not have an air force burning up billions of dollars of fuel and bombs each year. They don’t maintain naval fleets spending millions of dollars an hour. As a matter of fact Panama lacks enemies getting along with the rest of the world instead, imagine that.

Panama like Costa Rica realized some years ago that their militaries were not being used to defend the land against invaders but instead were being used to suppress the people and keep dictators in power. Thus Panama did away with its military as did Costa Rica. We do have a National Police but the Police do not have fighter jets, combat helicopters, tanks, artillery, paratroopers, etc.

Panama is a neutral country; it is in the UN and even currently has a seat on the UN Security Council. An unfriendly invasion of Panama would result in dire action from the UN. Panama has a lot of friends.

China does a lot of business with Panama even having the contracts to handle the container loading and unloading at both ends of the Panama Canal. China commerce is quite dependent on the Panama Canal and one could speculate they would not be pleased with anyone that interfered with their flow of commerce through the canal. Additionally Panama and the USA have a treaty regarding the protection of the Panama Canal. If the USA feels the Panama Canal is being threatened they have the right to intervene militarily. This would mean US fighter jets in the skies over Panama within about two hours, then comes Cobra Helicopter Gunships later in the day followed by expeditionary force marines and paratroopers landing in and around the canal, after about 12 hours Coast Guard cutters would be seen in Panama Bay along with unseen submarines, and by the next day an aircraft carrier flotilla would be seen in Panama Bay with marines landing in droves protected by extensive air cover and that would be that. The treaty only covers the Canal Zone which is a 25 square mile piece of land which used to be the American Military Base. DOWNTOWN PANAMA CITY AND THE BANKS, STOCKBROKERS ARE NOT IN THE CANAL ZONE. In any event Panama has spared itself the burden of maintaining a military. It has also spared itself the expense of having a central bank. Does the word “smart” come to mind?

Dollarization, Doom and Gloom - We get a lot of inquiries from international clients fearful of the US dollar dropping etc. We are sympathetic to the concerns of our clients and of course get them Euro banking accounts if they desire but there is more to this problem.

If the dollar goes much lower what happens to the EU. Things are not so good there these days. They have absorbed a lot of Eastern Europe nations who can now travel freely and work in all the EU countries. This will drive wages down for sure and the social benefits that these economically stronger nations offer will surely be strained. USA goods can be sold into the EU cheaply since the dollar is down. EU goods are costly in the USA due to the cheap dollar. The big EU car manufacturers have been reducing production numbers steadily for the USA market as the dollar dropped and this is a very important market for them as evidenced by their high rates of unemployment.

There are foreign tourists dropping money in the USA since travel is cheaper due to the low dollar. There are fewer USA residents traveling abroad due to the weak dollar. This of course messes up the balance of payments for the EU countries which is a bad thing for their economy. The working people benefit from a high dollar but the industries suffer and vice versa. If the dollar goes much lower against the Euro it might push their economy into a serious dive. We almost never hear our clients talk about this for some reason.

The EU is not going to sit still for this and will take steps to drive the Euro down eventually, of course driving the dollar up does the same thing. Remember the large wealthy manufacturers, exporters, industrialists etc. thrive with a weak currency (they are more competitive internationally) and suffer when the currency is up (their international prices are higher due to the strong currency requiring more units of the foreign currency to pay for the purchase). In years past like the 1950’s and 1960’s the USA had a very strong currency. They had a fractional currency. Their dollar bills were silver certificates redeemable in silver coin. Imported goods were down during those years. There were very few foreign made cars sold in the USA during those years. The USA was to a great extent a self sufficient country so the strong currency was a bonus to those Americans traveling abroad or importing foreign goods.

In the very early 1970’s the US dollar was floated and that was the end of the US dollar being a strong currency. Now the world has no currency that is even partially tied to gold or silver reserves. Don’t think it is so easy to figure out where things are going. On any given day you can look at the Standard and Poor Stocks in the index and some have great profits, some have mediocre profits and some have losses yet their prices all move up and down with great consistency irrespective of the individual profit, loss and dividends of the specific corporations. The answer is of course diversification- different currencies and real estate, gold, silver, collectables etc. .

Dollarization Shift Potential – There is a question of whether or not Panama could go off the US dollar and go to another currency. It would probably not be a big deal for Panama to shift say to the Euro since it does not have a central bank it would just be a matter of exchanging one currency for another. There has been no talk of this. Panama could go to its own currency which would be a most unlikely event since it has been on the US dollar for over 100 years. The Central and South American nations are in process of trying to organize in ways to eliminate passports for cross border travel and end trade tariffs. Mercosur is one of the strongest organizations with 10 countries counting affiliates. There is also an Andes confederation but it has fewer countries some of which are affiliated with Mercosur. They are talking about getting their own World Bank and IMF type operation and having their own currency independent of the Euro and US Dollar. We need to wait and see. Will Panama participate, who knows, too soon to tell.

Panamas Banking System – Panama has a large amount of international banks. The Panama banking system is highly competitive with little government intervention. Panama allows foreign investors to freely invest in Panama. There are no capital movement restrictions and there are market determined interest rates. Panama Duty Free Zone in Colon – Many of the export activities in Panama takes place in free market duty free zones like Colon, where there is no government intervention or oppressive restrictions or taxation. Foreign ownership is widespread and encouraged.

Commercial Registration Services in Panama – This is an important part of the economic structure of Panama. There are 450,000 corporations and foundations registered in Panama each paying $300 a year in annual fees to the government This is $135,000,000. In addition to this is the revenue generated to the law firms, notaries, etc for handling these registrations. Many of the merchant marine vessels of the world are registered in Panama as well bringing in even more revenue to the country. The Panama Canal generates about one billion in revenue with a net profit of $335,000,000. Panama has 2.9 million people. If you add up the revenue just from the canal and the corporations you get $370,000,000 which is $162 per head of income just from these two sources. With the Canal revenue we used net, with the corporations we used gross but the cost of maintaining the workers and computers would not be that significant so we could reduce our figure to $160 per head and this is without getting into the boat registration fees, business licenses, property taxes, import duty, tourist head tax of $5.00 each, hotel taxes, sales taxes, and so forth. Panama has a healthy economy and it is not even tourist dependent.