Interview with Panama’s Minister of Economy and Finance, Dulcidio de la Guardia
Panama’s GDP growth rate has slowed under this administration; why is that?
Minister de la Guardia: Panama, is an open economy, closely linked to world trade and capital flows, so it’s been impacted by global economic cycles. A large share of global trade passes through our country, so we are impacted when world trade slows.
Nonetheless our best defence is economic diversification and that has helped us face the ups and downs of the world economy. We’ve been able to use strong foreign direct investment and public investment FDI and public investment to inject dynamism into our economy in recent years despite slower global growth. These investments have upgraded our infrastructure network, which boosts our competitiveness.
Today, Panama is the most diversified economy in the region and that has been achieved with low inflation of just 0.9% in 2017, which is the second-lowest in Latin America. We have an unemployment rate of 4.7% – the third-lowest in the region.
What impact has the Panama Canal expansion had on the wider economy?
MdlG: Clearly the expansion of the canal, which was finished in the middle of 2016, had a positive economic impact, helping to boost growth. For example, if you compared November 2017 with the same month in 2016, you see a 5.6% increase in ships passing for the canal, with net tonnage up 23.6%. Thanks to the expansion the canal now contributes $1.6billion per year to the nation’s finances, up from $1billion.
Without doubt the canal will continue to have a positive economic impact in the future…
Without doubt the canal will continue to have a positive economic impact in the future. In addition to the transit of cargo, we have identified median and long-term initiatives that will develop areas by the canal. According to the Masterplan of the Panama Canal Authority, the future operations will generate more added value and exploit the competitive advantages of the country and the geographic position of Panama.
In December Panama was placed on yet another international finance blacklist; has your government failed to clean up the Panama’s financial system or is Panama being unfairly targeted?
MdlG: Blacklist is not the correct term. The inclusion of Panama in the list of non-cooperative tax jurisdictions countries for was a unilateral decision by the EU. Panama is working in the inclusive Base Erosion and Profit Sharing (BEPS) framework of the OECD and the G20 to revise five special tax regimes, but that doesn’t include our call centre regime. The EU recognises the BEPS framework as valid so we were surprised that it unilaterally decided to question the call centre regime in Panama despite the commitment we’d showed to comply with international fiscal transparency standards.
The call centre industry in Panama has similar characteristics to other regimes in the region, but these others aren’t questioned. The EU’s later decision to remove Panama from the list was recognition that our country complies with the international standards of fiscal and financial transparency. The government is in contact with industry representatives to work closely on the revision of tax regimes to make adaptions according to the global standards without abandoning national interests.
Where are the opportunities in Panama for British investors?
MdlG: Panama has an important network of services developed around the Panama Canal, which reflects the dynamism of its commercial ports, communications, logistics and financial services. The Panama Canal and its connectivity is one of our main competitive advantages around which we have developed a logistics platform and connected services to serve global trade and movement of people. This platform is anchored by the Panama Canal and the ‘Hub of the Americas’ in Tocumen Airport.
The logistics sector represents 18% of GDP and it’s led by the canal, ports, airports and railway. Our country also offers a system of special economic zones that help trade and boost value for the logistic system. On the other hand, there are investment opportunities in financial intermediation services, which account for 7.7% of GDP. At present 88 banks are part of Panama’s international banking sector, with assets of more than $118billion. There are also exciting Fintech opportunities, which is being boosted by the expansion of mobile data coverage in Panama.
Panama has revamped a lot of its financial regulation; how has that improved the financial sector?
MdlG: The stability of the industry is a virtue that’s recently been recognised by the ratings agencies, with talk of a possible risk rating upgrade in 2018. That dispelled any possible doubts about reputational risk and shows the benefits of the country’s decision to sign up to various international agreements as well as passing many local laws and regulations.
For example, in 2017 Panama agreed to operate under the Multilateral Competent Authority Agreement (MCAA) based on common reporting standards (CRS), which has strengthened auditing for both financial and non-financial entities. It stems from the regulations approved in 2015 to investigate and eliminate money laundering and financing of terrorism in Panama.
Panama fully complies with international transparency standards and the exchange of information. We will keep taking the necessary steps to protect our financial centre from criminal activity. We created a roadmap, approved by a high-level commission, to protect the international financial services because we realise the competitiveness of the country depends on its adherence to the highest global standards in fiscal and financial matters.
You have served as minister for almost four years; what’s been your biggest achievement so far?
MdlG: Between 2015 and 2017 Panama made significant economic and financial advances. The country enjoyed average annual economic growth of 5.6%, more than $16.5billion was collected in tax and important progress made in financial and fiscal transparency. We are the fastest-growing economy in Latin America and the country with the lowest cost of financing, overtaking Chile for the first time. All of that has contributed to a better standard of living for the population.
The ministry that I lead keeps a keen eye on the financial plans and programmes that help reduce poverty. Between 2014 and 2016 poverty fell to 22.1% from 25.8% – that’s to say that 107,000 people came out of poverty. The dynamic economic activity has led to an increase in tax collection without having to increase taxes, while we have taken administrative steps to reduce tax evasion, so we’ve had more funds for public investment. We have modernised the General Directorate with the aim of improving the service to the contributors and increasing collection. As a result, fiscal revenues hit a record high in 2017 of $5.5billion. Through the creation of the Single Treasury Account, we have optimised the use of public funds, which has allowed us to save $1.5billion dollars of debt. We have also applied a new system, known as Istmo, that integrated the state’s accounts, improving the management of public resources with more efficiency and transparency.
On the international front, Panama kept advancing in its commitment to transparency through the adaption of its legislative framework, increasing tax information exchange and strengthening its ability to respond to requests for information exchange.