Caribbean & Central America - August 2022

The Partido Revoluciónario Democrático (PRD) government led by President Laurentino Cortizo has recently faced some of the worst unrest in decades, over complaints regarding high fuel costs, rising prices for basic goods, deteriorating public finances, and economic mismanagement. The unrest bears stark contrast to claims that President Cortizo recently made in his state-of-the-nation address on 1 July, the anniversary of his third year in office regarding economic progress under his watch.

In his balance sheet presented on 1 July, President Cortizo made multiple claims of progress, insisting that Panama was poised to maintain its position as “a benchmark for the region in democratic stability and social peace”. He cited Panama’s GDP growth of 15.3% in 2021, one of the highest in the region, without mentioning that the country suffered a 17.9% decline in 2020 due to the impact of the coronavirus (Covid-19) pandemic, the highest contraction in the region. Cortizo also highlighted strong trade, particularly in the Colón Free Trade Zone, which he said amounted to US$7.41bn in the first four months of 2022, up 17.6% on the same period in 2019. He said unemployment was back in single digits, to 9.9%, and also trumpeted social programmes such as Plan Panamá Solidario, which was set up during the pandemic to help the most vulnerable with food parcels and money transfers.

On 6 July, however, Panama erupted in protests, which were subsequently spear-headed by three main protest groups Alianza Nacional por los Derechos del Pueblo Organizado (Anadepo), Alianza Pueblo Unido por la Vida (APUV), and representatives from the indigenous Ngäbe Buglé Comarca (indigenous administrative region) (see sidebar). The spark for the protests was rising fuel costs and inflation which has been affecting the sub-region and beyond, exacerbated by the Ukraine war. In Panama inflation was running at 5.2% in June, up from 4.2% in May which, while low compared to its neighbours, was high for Panama which has historically had low inflation due to its dollarised economy.

The impact of price rises has been particularly powerful given that Panama is among the most unequal countries in Central America, and recent progress in reducing inequality was reversed from 2018-2019 when the country’s Gini coefficient (a measure of inequality in which 0 indicates perfect equality and 1 equals maximal inequality), rose from 0.501 to 0.506 according to the latest figures from the United Nations Economic Commission for Latin America (Eclac). Rural areas have increasingly been left behind, with poverty rates six times higher than in cities prior to the Covid 19 pandemic. That inequality increased after a period in which Panama recorded high, albeit declining, growth rates also contributed to increasing discontent with the political class.

While Cortizo government blamed the cost-of-living crisis on the pandemic and Ukraine war, the situation has nonetheless subjected the government to familiar complaints regarding the lack of transparency in the management of the economy and corruption. On 1 July, the same day that Cortizo gave his balance sheet, the Fundación para el Desarrollo de la Libertad Ciudadana (FDLC), the local branch of anti-corruption NGO Transparency International, published a statement precisely bemoaning a lack of transparency in the management of the economy. FDLC criticised the fact that a government decision to authorise a further debt issuance of up to US$1.8bn on 29 June was able to pass without scrutiny, as the state of emergency declared at the start of the pandemic is still in force. This means that the management of public finances has suffered from a lack of transparency in the past two years, according to the statement, despite the government agreeing to a number of measures as part of an open governance plan in September 2021. And, in a 12 July statement, the FDLC flags up rising public debt, which it says has been destined for apparent “discretionary uses”, motivated by “political objectives” rather than public services or creating jobs.

Protesters’ demands and concessions

A reduction in living costs topped the list of eight demands presented by the protest groups during a dialogue table with the government which began on 21 July in Penonomé, the capital of Coclé province, mediated by the Catholic Church, aimed at putting an end to the unrest. The other demands included: reduced fuel prices; lowering the cost of, and ensuring the supply of, medicines without privatising the social security institute (CSS); assigning 6% of GDP to education; reducing energy costs; discussing the financial situation of the CSS; tackling the fight against corruption; and installing an inter-sectoral table to monitor agreements reached. 

At the time of writing, the two sides had yet to reach a final agreement. However even before the dialogue began, the government was compelled to offer concessions. These include price caps on basic goods; a freeze on fuel prices to US$3.25 per gallon, down from an earlier pledge of US$3.95; and an order for public institutions to introduce austerity measures such as cutting payrolls by 10% and reducing discretionary spending. In the context of the dialogue, the government has since announced further measures. These include a 30% reduction in the cost of a basic basket of goods; price controls on a further 72 products; and temporary elimination of import tariffs on various products for six months, subject to renewal, among other measures.

Impact

The private sector has been quick to warn of the economic impact of the unrest and road blockades which were concentrated in the provinces of Chiriquí, Veraguas, Panama (including the metropolitan area), and Darién as well as strategic roads such as the Pan-American Highway, which connects Panama with the rest of the sub-region and is a key route for goods. Business lobby Cámara de Comercio, Industria y Agricultura de Panamá (CCIAP) was cited by the media as saying that protests were causing potential daily losses of US$16m. A 25 July statement by the International Committee of the Red Cross (ICRC) warned that fuel was in short supply, and food production was being lost at harvesting points (it cites media reports of US$500m in estimated losses in the production chain) or in cargo trucks stranded at blockades.

Meanwhile international credit ratings agencies Moody’s and Fitch Ratings have warned of the fiscal implications of the government concessions. A Fitch report released on 26 July for example notes that while the government has approved spending up to US$200m (0.3% of GDP) to subsidise gasoline costs over three months, the announced subsidies could be maintained for longer if social unrest persists, or if increased or extended to other goods. The cost of extending social transfers granted through the pandemic, which the government had previously announced it would do, now looks likely to be more than the US$400m budgeted for 2022. Fitch notes that while the 2022 budget targets a 4% of GDP non-financial public sector (NFPS) deficit, down from 6.7% last year and compliant with the modified fiscal responsibility law, the initial fiscal response to the unrest points to higher risks that authorities miss their 2022 deficit target.

This will also make it harder to reduce the country’s debt burden, which fell to 64.2% of GDP by end-2021 from 68.5% in 2020 on Fitch estimates. At the end of June, Panama’s debt hit US$43.18bn, up from US$26.61bn when Cortizo took office on 1 July 2019, according to monthly reports from the country’s finance ministry. This is an increase of US$16.6bn. While this period does include the Covid-19 pandemic, protesters demanding better management of public finances have not accepted this as an explanation for the increase in debt. 

• Protest groups

Anadepo which launched last month, represents teachers, university staff, and transport workers among others, while APUV groups leading unions, including Sindicato Único Nacional de Trabajadores de la Construcción y Similares (Suntracs), Confederación Nacional de Unidad Sindical Independiente (Conusi), and teachers’ unión, and Asociación de Profesores de la República de Panamá (Asoprof).

• Questioning measures

In its 26 July report Fitch questions measures announced by the government aimed at quelling unrest. For example, in the cast of austerity measures, it notes that “previous efforts at payroll reduction have yielded little (it rose to 6.0% of GDP in 2021 from a low of 3.9% in 2014)…we think it unlikely that large, rapid savings will be made via these measures, although capital expenditures may be cut to reduce spending pressures”.