Review of Shocks in the Economy

Abstract

The Panamanian economy performed spectacularly starting in 1989, growing at an average real rate of 6% per year for thirty years. It was the highest registered in the Latin American Region and one of the highest globally. In addition, important achievements were obtained that were not achieved in other countries inside and outside the region. The middle class expanded and strengthened. The general poverty level fell from 37.9% in 2000 to 21.5% in 2019, and the extreme poverty level from 21.9% to 10.0%, mainly due to transfers from low-income households. Income inequalities improved by reducing the GINI coefficient from 56.6% in 2000 to 49.8% in 2019, although these were high concerning other Latin American countries. As a result, Panama entered the group of countries classified as high-income by the World Bank. Plus, the economy has recently been hit hard by the Covid-19 pandemic—this immobilized economic activity due to the high population. Density and contagion in the metropolitan area caused by overcrowding in low-income neighborhoods extend its destructive impact on the rest of the country. This required reducing and temporarily closing commercial, service, and production activities. These actions caused a sharp drop in GDP and GDP per capita, the largest in the region and one of the largest in percentage terms globally, a sharp contraction of imports, a rapid expansion of unemployment, a collapse in tax revenues, financial difficulties in small and medium-sized enterprises (SMEs), and a loss of income in low-income and informal groups, and in those of the middle class with suspended employment contracts. A post-Covid-19 growth recovery should not be defined as a return to pre-pandemic levels of economic activity likely to external shocks but as a turning point towards more productive, shock-resistant, and inclusive growth patterns. Growth will happen, although it could be slow and gradual initially. A significant part of daily economic activity operates in a consumer economy environment. At this juncture, it will be essential for consumers to secure their income to maintain a standard spending rate in a context in which the pandemic's adverse impact on Panamanians' health is diminishing.