Panama Uses the U.S. Dollar

Overview

The Republic of Panama, rich in culture and diverse in business and industrial sectors, operates with two currencies: the U.S. dollar and the Balboa. Since the construction of the Panama Canal between 1904 and 1914, the U.S. dollar has been used alongside the Balboa, establishing a stable and sustainable economic platform that has fostered growth and controlled inflation.

Currency System in Panama

The Panamanian Balboa (PAB), the national currency, circulates only in coin form with denominations of 1, 5, 10, 25, and 50 centavos, and one Balboa, equivalent to one U.S. dollar. These coins are interchangeable with U.S. coins in commercial transactions. Interestingly, Canada mints Panama's coins due to the absence of a national mint in Panama.

Unlike most countries, Panama does not have a central bank to implement monetary policies or issue currency. Instead, the banking system is regulated by the Superintendency of Banks of Panama, ensuring transparency and adherence to legal norms.

Economic Implications

Adopting the U.S. dollar has significantly contributed to Panama's economic stability. Dollarization helps mitigate risks such as currency depreciation and inflation, which are common in other regions. Currently, Panama's inflation rate remains exceptionally low at about 1.96%.

The Panamanian Constitution prohibits the issuance of paper Balboa notes, necessitating the use of the U.S. dollar and underscoring the commitment to a dollarized economy. This policy has been crucial in achieving economic stability and attracting foreign investment.

Benefits of Dollarization

Dollarization offers several advantages for Panama:

Stability: The U.S. dollar, being one of the world's most stable currencies, shields Panama from potential price fluctuations and currency performance issues.
Investment: Operating with a major global currency enhances Panama's appeal to international investors, particularly in the canal, free trade zones, and natural resource sectors.
Lower transaction costs: Dollarization eliminates the costs associated with foreign exchange, keeping Panama competitive in global trade.

Challenges and Perspectives

Despite the benefits, dollarization also presents challenges. Panama's monetary policy is tied to that of the United States, limiting its ability to address unique domestic economic situations. Any economic downturns in the U.S. could directly impact Panama.

However, the political and economic momentum to maintain the U.S. dollar remains strong, with widespread trust in the currency that new or reintroduced currencies could not easily replace.

Future Outlook

The U.S. dollar is expected to continue as the primary currency in Panama for the foreseeable future, supported by the confidence of the populace and key public sectors. This longstanding practice has insulated Panama from the severe economic crises experienced by some neighboring countries.

Sources & Footnotes

[1] International Monetary Fund (IMF)
[2] Bank for International Settlements (BIS)
[3] The World Bank
[4] Mises Institute on Panama's lack of a central bank
[5] Journal of Latin American Studies