Very few human construction projects have changed the face of the Earth as much as did the successful completion of the inter-oceanic Panama Canal in 1914 by the United States, splitting the continents and forging a vital transportation link for the entire world. The Canal remains today one of the greatest engineering marvels of the modern world. At the end of 1999 its control and management was turned over to Panama after 96 years of American domination.
But before there could be a canal, there needed to be country called "Panama."
With the help of the ebullient President Teddy Roosevelt and the U.S. Navy battleship, USS Nashville standing offshore in the Pacific, Panama declared its independence from Colombia in 1903. America immediately recognized the declaration, allowing the building of the canal.
Along with the influx of Americans and the U.S. military, came the U.S. dollar as Panama's official currency.
The U.S. dollar has been Panama’s currency since 1904, although locally it is called the "Balboa" as a bow to nationalism. Cash is supplied by the Federal Reserve Bank of New York, which also acts as a clearinghouse for Panama’s global transactions. As a consequence, fiscal policy is the government’s principal macroeconomic policy instrument.
Since Panama does not have a central bank to print its own currency, official spending and investment is limited strictly by tax and non-tax revenues and the government’s ability to borrow. Thus, creditworthiness is linked directly to the health of public finances. And Panama's governments have a long history of deficit spending, although that has improved somewhat in recent years under the current president, Martin Torrijos.
Tied to the Federal Reserve
Panama has no official central bank, but the state-owned Banco Nacional de Panamá (BNP), the largest commercial bank, performs many of the functions of a central bank, including financing arrangements for government loans and bond issues, payment of government obligations and employee salaries and benefits. It also acts as a clearinghouse for foreign currencies and dollars, the latter supplied by the Federal Reserve Bank of New York, with which the bank is affiliated.
In the past the disadvantage of not having an independent monetary or exchange rate was not a serious problem for an economy the size of Panama. The advantages more than outweigh the inconveniences. Moreover, in an era of dollarization of other economies (Ecuador, Guatemala), Panama was the pioneer, a century ahead of most others.
Asked "Why is our currency the U.S. dollar?" "Because we were visionaries," said Romel Adames, Panama's former vice minister for commerce and industry. "Using the greenback saves Panama the expense of maintaining a national mint and, more important, shields the economy from inflation and manipulation of the money supply," he noted. "There’s no sovereignty issue here," he insisted.
That may have been true in the past, but Panama views about the dollar are changing.
Shield No More
Shielding from inflation may have been the dollar's virtue in Panama in the past, but not any longer.
Panama consumer prices are being hit especially hard due to the continuning devaluation of the U.S. dollar and its depreciating purchasing power.
Until now Panama's use of the dollar has been a blessing as it kept inflation low and the economy stable. Now with the dollars decline, Panama is feeling the negative side of this relationship in every sector.
According to the Panama Comptrollers office, the price of food has increased 17.2% over last year, and many saw it exceeds 20%. Consumer prices in Panama rose 0.8% in May, while 12-month inflation at the end of the month was 8.8% as consumers paid more for gasoline and food.
Hard Hit
One Panama observer claims that "the lower income people of Panama are getting hit from every angle. Utilities, food, transportation, gas, housing, rent, health care, medicine, propane, loans just to name some of the costs of living they struggle with. Their combined family income is gone by the time they buy basic food, housing, water and electricity and care for children."
It appears that eight years of Bush deficit spending, piling up trillions in national debt, have hurt more than just Americans. These irresponsible fiscal and financial policies now have found their way to Panama and other U.S. dollar denominated economies of the world.
Some Good News
Even though inflation is a problem growing Panama is expected to replace El Salvador as the Latin American region's 13th-largest economy, according to analysis of IMF forecasts. Panama's GDP will likely reach $22.9 billion this year, passing that of El Salvador at $21.8 billion.
In the past few years, fueled by a major real estate and construction boom, Panama's GDP annual growth has approached 10%, one of the highest in the world. This year it is expected to drop back to about 7%.
Last year Citigroup, which has long had a financial presence in Panama, issued a very positive current assessment of the nation's economy.
The Citigroup experts expected the country to attain an "investment grade" rating in the second half of 2009. Investment grade is the credit rating given a bond judged by ratings services such as Moodys and Standard and Poors likely to meet payment obligations so that banks are allowed to invest in them.
If that happens it will be a first for Panama and it would be based not just on the $6 billion expansion of the Panama Canal, but also for the building of major development projects, whole new cities and badly needed infrastructure improvements. (But some are questioning whether the needed capital will be available for the Canal expansion if the U.S. recession spreads).
What a difference a few months make.
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