## 2. Infrastructure Quality Indicators Relative to GDP per Capita (2014)

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### Key development and methodological approach
- Expanded Panama Canal:
  - Opened in June 2016.
  - Designed to accommodate “post-Panama” vessels and roughly double the Canal’s capacity.
  - Expected opportunities: transit of LPG and LNG vessels; strengthened growth prospects for related industries such as ports and logistics.
  - Provided an important impetus to Panama’s strong growth performance over 2007–16.
- Methodological approach:
  - Backward-looking methodologies based on historical data series may be significantly reduced in relevance when structural changes take place.
  - Paper follows a forward-looking eclectic approach to capture prospective trends from different perspectives and analytical angles.
  - Approach combines:
    - an assessment of Panama’s growth determinants,
    - a deeper analysis of investment as a driver of growth,
    - case studies of the logistics and tourism sectors.

### Recent growth performance and growth determinants
- Recent growth performance:
  - Panama has had the highest growth in LAC over the past two decades; per capita income has doubled since 2004.
  - Growth moderated to 4.9 percent in 2016.
  - Moderation primarily associated with a slowdown of construction, including due to completion of the expansion of the Panama Canal.
  - Economy appears to be shifting from construction-led growth toward services.
  - Social outcomes improved with important declines in poverty and income inequality.
- Determinants of growth: assessment and binding constraints:
  - Key growth policy priorities:
    - Improving the quality of education.
    - Strengthening governance.
    - Reducing bureaucracy.
  - Infrastructure:
    - Overall infrastructure quality is high regionally; strengths linked to Panama’s role as a regional transportation hub.
    - Tocumen airport expansion is expected to be completed in 2018.
    - Panama is a regional telecommunications hub but internet usage is low compared to other countries in Latin America.
    - Panama is a net exporter of electricity and is constructing new transmission lines to increase exports.
  - Education:
    - Workforce has higher educational attainment than other Central American and Dominican Republic peers (higher share of secondary/tertiary graduates and average years of schooling) but weak outcomes in international competency tests (TERCE 2013), particularly in mathematics and reading comprehension.
    - Education and training subindex of the World Economic Forum’s Global Competitiveness Index shows underperformance.
    - An inadequately educated workforce is the third most frequently cited problematic factor for doing business in Panama in the 2016–17 Global Competitiveness Report.
    - Government emphasis on education reform, including a new technical institute (ITSE), to address skills gaps.
  - Cost of finance and financial sector:
    - Financial sector assets equal 238 percent of GDP.
    - Banks represent about 90 percent of assets; offshore banks hold about 16 percent of bank assets.
    - Banking system has 55 banks, including two state-owned banks.
    - Credit to the domestic private sector is high relative to regional standards and Panama’s level of development.
    - Real lending rate among the lowest in Latin America.
  - Business environment and governance:
    - Macroeconomic policy framework anchored in fiscal discipline; Social Fiscal Responsibility Law (SFRL) with public debt projected to remain below the SFRL target of 40 percent of GDP.
    - Microeconomic risks: governance weaknesses and inefficient government bureaucracy; corruption and bureaucracy identified among most problematic factors for doing business.
    - Tax-to-GDP ratio among the lowest in the region.
  - Diagnostic conclusion:
    - Education reform (addressing skills gaps) identified as the most important challenge to sustain the business model and move up the value chain in services.
    - Reducing bureaucracy and strengthening governance are important complementary priorities.

### Investment as a driver of growth: pipeline, quantified contributions, and scenarios
- Historical role of investment:
  - Investment (public and private) contributed on average 4 percentage points to Panama’s annual economic growth over 2008-2016.
  - Panama Canal expansion estimated at about US$5.3 billion over 2007–16.
- Pipeline of projects:
  - Total value of large projects under construction or advanced planning is estimated at US$16.7 billion, or about 30.3 percent of Panama’s 2016 GDP.
  - Minera Panamá estimated total value US$5.5 billion, with US$2 billion remaining to be executed until its expected completion in 2018.
- Quantified growth contributions from projects:
  - Direct contribution to growth from projects in Table 1 is estimated at about 2 ½ percentage points over 2017 and 2018 in the baseline scenario.
  - Indirect contribution (multiplier effects) is estimated at ½ percentage points on average over the period 2018–21.
- Sensitivity/adverse scenario:
  - Adverse scenario assumptions:
    - Import content of all projects is higher by 10 percentage points.
    - Start of construction and timeline for new projects shifted forward by one year.
    - Execution of ongoing projects drops by 1/3 in 2017 and completions delayed by one year.
  - Estimated impact: about 1 percentage point lower growth contribution per year relative to baseline.
- Productivity and fiscal considerations:
  - Infrastructure investments can yield productivity enhancements (e.g., shorter commuting times from new metro lines, improved energy supply and potential cost reductions).
  - Public sector accounts for over half of the estimated value of large-scale projects; stronger fiscal revenues are essential to preserve space for planned investment.
  - Despite improvement in 2016, Panama’s tax revenues remain among the lowest in the region and well below peers at similar development levels; without increased revenues, recurrent spending could crowd out capital spending.

### Growth accounting and medium-term projections
- Growth accounting (assumptions: initial capital stock = three times GDP; labor elasticity 0.6; capital elasticity 0.4; depreciation 5 percent/year).
- Factor contributions (average, percentage points):
  - 2008–2015: Labor (L) = 1.88; Capital (K) = 3.75; TFP = 1.31; Output (Y) = 6.93.
  - 2016–2022 (projected): Labor (L) = 1.46; Capital (K) = 2.80; TFP = 1.16; Output (Y) = 5.42.
- Gross capital formation:
  - Estimated about 47 percent of GDP in 2016.
  - Projected to decline to about 42 percent of GDP over the medium term.
  - Capital’s average contribution to growth expected to be about 1 percentage point lower than over 2008–15.
- Resulting medium-term growth revision:
  - Projected medium-term growth revised from about 6 percent (2016 Article IV) to about 5.5 percent (2017 consultation), driven by moderation of investment.

### Transforming Panama into a global logistics hub: comparative advantages and lessons from Singapore
- Panama’s comparative advantages for logistics:
  - Interoceanic Canal: about 5 percent of world merchandise trade transits the Canal.
  - Existing internal rail and road network connecting two sides of the Canal.
  - Tocumen International Airport operates as a regional hub.
- Projected synergies from infrastructure expansion (Canal, ports, airport, metro) can enhance Panama’s attractiveness for logistics, investment, and tourism.
- Singapore case study — key factors in Singapore’s emergence as a global logistics hub:
  - Connectivity (maritime and civil aviation networks).
  - World-class infrastructure.
  - Encouragement of private sector participation and synergies between transport and logistics, financial intermediation, insurance, and information and communication technologies.
- Comparative figures:
  - Singapore: largest container transshipment port; connections to over 600 ports.
  - Panama: first and second busiest ports in the region; second largest free trade zone in the world (after Hong Kong).
  - Air connectivity:
    - Singapore: about 7,000 weekly flights to 330 cities in 90 countries and territories.
    - Panama (Tocumen): flights to over 80 cities in 35 countries.
  - Trade composition:
    - Singapore: trade activity represents over 300 percent of GDP.
    - Panama: trade concentrated in services and represents about 60 percent of GDP.
- Port performance and shipping connectivity:
  - Total container traffic through Panama’s ports is about one fifth of Singapore’s.
  - Panama’s growth has been significantly faster than Singapore’s over the last decade.
  - Panama narrowed its connectivity gap relative to the world’s top ports over the last decade according to the World Bank’s liner shipping connectivity index, though it still lags behind all 5 top ports.
- Logistics Performance Index (LPI) progress and remaining gaps:
  - Panama’s improvement in logistics performance since 2007 was broad-based: logistics quality and competence, cross-border shipments, infrastructure, customs.
  - Panama narrowed its gap relative to Singapore in areas relevant for logistics performance such as cross-border shipping, infrastructure, and logistics quality and competence.
  - Significant gaps remain in most logistics segments, including customs efficiency, timeliness, tracking and tracing, and infrastructure.
- Policy areas to transform Panama into a global logistics hub:
  - General strengthening of institutions.
  - Enhancements in the education system and infrastructure quality.
  - Strengthened contract enforcement.
  - Better capacities to absorb new technologies.
  - Promotion of a culture of paying taxes.

### Tourism: role, performance, competitiveness, and opportunities
- Importance of tourism:
  - WTTC estimates tourism’s total contribution to output is 17 percent of GDP.
  - Tourism is estimated to account for about 12 percent of total employment.
  - About 3 percentage points of the contribution of tourism to employment is directly related to jobs in hotels and restaurants and other tourist activities; the remainder is associated with supply-chain effects.
- Source markets and trends:
  - Almost 60 percent of tourists originate from Latin America and the Caribbean.
  - South America accounted for 46 percent of total arrivals in 2015, Central America 10 percent, and the Caribbean 2 percent.
  - In 2015 South American tourists still accounted for 11 percentage points more of total tourist arrivals than in 2006.
  - The U.S. accounted for 17 percent of tourism to Panama in 2015; the U.S. market share declined about 10 percentage points since 2006.
  - Data on country of origin covers only passengers arriving through Tocumen airport and excludes cruise passengers and passengers arriving by land; passengers arriving by land represent 6 percent of total arrivals.
- Characteristics of tourism demand:
  - Leisure travel dominates visitors’ motivation.
  - Business travel, including for conventions, has traditionally been important; a new convention center nearing completion is expected to increase this segment.
  - Tourism remains concentrated in Panama City; over 40 percent of tourist accommodations are located in Panama City.
  - Average tourist stay: about 8 and a half days.
  - Average daily spending: about US$270 a day or over US$2300 for the duration of their stay.
- Competitiveness and costs:
  - Panama remains an affordable travel destination according to the ‘Week-@-the-Beach’ (W@tB) Index.
  - Panama compares favorably in price to Central and South American destinations and the tourism-dependent Caribbean.
  - Panama’s REER appreciation, driven largely by the appreciation of the U.S. dollar, has diminished price competitiveness for tourism.
- Recent performance:
  - Total tourism arrivals declined in 2016 relative to earlier years due to the regional recession in Latin America and the appreciation of the U.S. dollar.
  - Hotel occupancy rates at 52 percent in 2015 are low, primarily reflecting historical over-investment in hotel room stock, particularly in Panama City.
  - Despite the decline in arrivals, tourism receipts rose.
- Tourism growth and market share:
  - Panama’s tourism growth rate recorded 5.6 percent, down from 12.8 percent in 2015.
  - Panama continued to grow its market share of total tourism expenditure in Latin America and the Caribbean, both in leisure and business tourism.
  - Relative to tourism competitors in CAPDR, Panama’s market share has been stable since 2012.
- Opportunities and strategic recommendations:
  - Tocumen airport: only about 10 percent of travelers transiting through the airport visit Panama; convert more transiting passengers into visitors.
  - Tocumen airport expansion is expected to be opened in 2018 and will boost airlift supply.
  - Coordinate airport expansion with tourism promotion and airline partnerships (e.g., free stopovers).
  - Cruise segment: expanded Canal provides opportunity to grow cruise segment; developing a new cruise terminal could position Panama as a home port.
  - Diversify tourism beyond Panama City (beach and eco-tourism) by improving internal connectivity and supporting tourism operators outside Panama City.
  - Strategy to diversify: strengthen marketing of Panama’s diversified tourism product; encourage development of tourism operators outside Panama City.
  - Diversification can support inclusive growth and help reduce significantly higher poverty rates in rural areas.

### Policy recommendations and strategic priorities (summary)
- Strengthen the quality of education and implement education reform, including technical training (ITSE), to address skills mismatches and facilitate moving up the services value chain.
- Strengthen governance and reduce inefficient bureaucracy to improve the microeconomic business environment and attract private investment.
- Develop macroprudential policy framework and associated tools; strengthen financial sector oversight, particularly of systemic risks from prolonged credit expansion.
- Strengthen the crisis management framework, including the establishment of a liquidity facility for banks.
- Increase fiscal revenues to preserve space for strategic public investment and avoid crowding out capital spending.
- Promote measures to capture transit passengers at Tocumen airport, develop cruise-supporting infrastructure, and improve internal connectivity to diversify tourism geographically.

_italicized source attribution: IMF Working Paper wp17150 (wp17150.pdf)._

### 2. Infrastructure Quality Indicators Relative to GDP per Capita (2014) ____________________________ 7

### 2. Infrastructure Quality Indicators Relative to GDP per Capita (2014)

### Key development: Panama Canal expansion
- The expanded Panama Canal opened in June 2016.
- The expansion is designed to accommodate “post-Panama” vessels and roughly double the Canal’s capacity.
- Expected new opportunities include transit of LPG and LNG vessels and strengthened growth prospects for related industries such as ports and logistics.
- The Canal expansion provided an important impetus to Panama’s strong growth performance over 2007–16.

### Methodological approach
- The paper argues that backward-looking methodologies based on historical data series may be significantly reduced in relevance when structural changes take place in the economy.
- Instead of relying on backward-looking data techniques to filter or extrapolate historical data series, the paper follows a forward-looking eclectic approach.
- The forward-looking eclectic approach aims to capture prospective trends in the economy from different perspectives and analytical angles.
- The approach combines:
  - an assessment of Panama’s growth determinants,
  - a deeper analysis of investment as a driver of growth,
  - case studies of the logistics and tourism sectors.

### Structure and focus of the paper
- Section II: Looks at Panama’s growth determinants and compares them with peer countries.
- Section III: Assesses the importance of investment as a driver of economic growth, with a focus on the contribution from the existing pipeline of public and private investment projects.
- Sections IV and V: Provide case studies that examine Panama’s potential to further exploit its comparative advantage in the logistics and tourism sectors.

*Source: wp17150 - 2. Infrastructure Quality Indicators Relative to GDP per Capita (2014), wp17150.pdf*

### Section VI concludes.

### Section VI concludes.

### Recent growth performance
- Panama has had the highest growth in LAC over the past two decades; per capita income has doubled since 2004 and shown strong convergence with advanced economies.
- Growth has moderated from exceptionally high rates, reaching 4.9 percent in 2016.
- The moderation is primarily associated with a slowdown of construction, including due to the completion of the expansion of the Panama Canal.
- The economy appears to be shifting from construction-led growth toward services.
- Social outcomes improved with important declines in poverty and income inequality (Figure 1).

### Determinants of growth: assessment and binding constraints
- Key growth policy priorities identified:
  - Improving the quality of education.
  - Strengthening governance.
  - Reducing bureaucracy.
- Infrastructure
  - Overall infrastructure quality is high regionally; strengths linked to Panama’s role as a regional transportation hub.
  - Panama Canal expansion began commercial operations in June 2016.
  - Tocumen airport expansion is expected to be completed in 2018.
  - Panama is a regional telecommunications hub (interconnection point for submarine fiber cables) but internet usage is low compared to other countries in Latin America.
  - Panama is a net exporter of electricity and is constructing new transmission lines to increase exports.
- Education
  - The Panamanian workforce has higher educational attainment than other Central American and Dominican Republic peers (higher share of secondary/tertiary graduates and average years of schooling) but weak outcomes in international competency tests (TERCE 2013), particularly in mathematics and reading comprehension.
  - The education and training subindex of the World Economic Forum’s Global Competitiveness Index shows underperformance.
  - An inadequately educated workforce is the third most frequently cited problematic factor for doing business in Panama in the 2016–17 Global Competitiveness Report.
  - The government’s renewed emphasis on education reform, including a new technical institute (ITSE), is highlighted to address skills gaps.
- Cost of finance and financial sector
  - Financial sector assets equal 238 percent of GDP.
  - Banks represent about 90 percent of assets; offshore banks hold about 16 percent of bank assets.
  - The banking system has 55 banks, including two state-owned banks.
  - Credit to the domestic private sector is high relative to regional standards and Panama’s level of development.
  - Real lending rate among the lowest in Latin America.
- Business environment and governance
  - Macroeconomic policy framework anchored in fiscal discipline; Social Fiscal Responsibility Law (SFRL) with public debt projected to remain below the SFRL target of 40 percent of GDP.
  - Microeconomic risks relate to governance weaknesses and inefficient government bureaucracy; corruption and bureaucracy identified among most problematic factors for doing business.
  - Tax-to-GDP ratio among the lowest in the region.
- Diagnostic conclusion
  - The growth diagnostic identifies education reform (addressing skills gaps) as the most important challenge to sustain the business model and move up the value chain in services.
  - Reducing bureaucracy and strengthening governance are important complementary priorities.

### Investment as a driver of growth: sustainability and projections
- Historical role of investment
  - Investment (public and private) contributed on average 4 percentage points to Panama’s annual economic growth over 2008-2016.
  - Panama Canal expansion estimated at about US$5.3 billion over 2007–16.
- Pipeline of projects
  - Total value of large projects under construction or advanced planning is estimated at US$16.7 billion, or about 30.3 percent of Panama’s 2016 GDP.
  - Minera Panamá estimated total value US$5.5 billion, with US$2 billion remaining to be executed until its expected completion in 2018.
- Quantified growth contributions from projects
  - Direct contribution to growth from projects in Table 1 is estimated at about 2 ½ percentage points over 2017 and 2018 in the baseline scenario.
  - Indirect contribution (multiplier effects) is estimated at ½ percentage points on average over the period 2018–21.
- Sensitivity/adverse scenario
  - Adverse scenario assumptions:
    - Import content of all projects is higher by 10 percentage points.
    - Start of construction and timeline for new projects shifted forward by one year.
    - Execution of ongoing projects drops by 1/3 in 2017 and completions delayed by one year.
  - Estimated impact: about 1 percentage point lower growth contribution per year relative to baseline.
- Productivity and fiscal considerations
  - Infrastructure investments can yield productivity enhancements (e.g., shorter commuting times from new metro lines, improved energy supply and potential cost reductions).
  - Public sector accounts for over half of the estimated value of large-scale projects; stronger fiscal revenues are essential to preserve space for planned investment.
  - Despite improvement in 2016, Panama’s tax revenues remain among the lowest in the region and well below peers at similar development levels; without increased revenues, recurrent spending could crowd out capital spending.

### Growth accounting and factor contributions
- Growth accounting (assumptions: initial capital stock = three times GDP; labor elasticity 0.6; capital elasticity 0.4; depreciation 5 percent/year).
- Factor contributions (average, percentage points):
  - 2008–2015: Labor (L) = 1.88; Capital (K) = 3.75; TFP = 1.31; Output (Y) = 6.93.
  - 2016–2022 (projected): Labor (L) = 1.46; Capital (K) = 2.80; TFP = 1.16; Output (Y) = 5.42.
- Gross capital formation:
  - Estimated about 47 percent of GDP in 2016.
  - Projected to decline to about 42 percent of GDP over the medium term.
  - Capital’s average contribution to growth expected to be about 1 percentage point lower than over 2008–15.
- Resulting medium-term growth revision:
  - Projected medium-term growth revised from about 6 percent (2016 Article IV) to about 5.5 percent (2017 consultation), driven by moderation of investment.

### Transforming Panama into a global logistics hub: lessons from Singapore
- Panama’s comparative advantages for logistics
  - Interoceanic Canal: about 5 percent of world merchandise trade transits the Canal.
  - Existing internal rail and road network connecting two sides of the Canal.
  - Tocumen International Airport operates as a regional hub.
- Projected synergies from infrastructure expansion (Canal, ports, airport, metro) can enhance Panama’s attractiveness for logistics, investment, and tourism.
- Singapore case study: key factors in Singapore’s emergence as a global logistics hub include:
  - Connectivity (maritime and civil aviation networks).
  - World-class infrastructure.
  - Encouragement of private sector participation and synergies between transport and logistics, financial intermediation, insurance, and information and communication technologies.
- Comparative notes (selected figures from Table 3):
  - Singapore: largest container transshipment port in the world; connections to over 600 ports.
  - Panama: first and second busiest ports in the region; second largest free trade zone in the world (after Hong Kong).
  - Air connectivity:
    - Singapore: about 7,000 weekly flights to 330 cities in 90 countries and territories.
    - Panama (Tocumen): flights to over 80 cities in 35 countries.
  - Trade composition:
    - Singapore: trade activity represents over 300 percent of GDP.
    - Panama: trade concentrated in services and represents about 60 percent of GDP.

### Policy recommendations and priorities (implicit and explicit)
- Strengthen the quality of education and implement education reform, including technical training (ITSE), to address skills mismatches and facilitate moving up the services value chain.
- Strengthen governance and reduce inefficient bureaucracy to improve the microeconomic business environment and attract private investment.
- Develop macroprudential policy framework and associated tools; strengthen financial sector oversight, particularly of systemic risks from prolonged credit expansion.
- Strengthen the crisis management framework, including the establishment of a liquidity facility for banks.
- Increase fiscal revenues to preserve space for strategic public investment and avoid crowding out capital spending.

*Italic: Source — wp17150 - Section VI concludes.*

### conclusion of aviation agreements with over 130 states and territories. At the same time, the

### wp17150 - conclusion of aviation agreements with over 130 states and territories. At the same time, the

### Connectivity, trade agreements, and infrastructure
- Conclusion of aviation agreements with over 130 states and territories.
- Built an extensive network of free-trade agreements with over 30 economies, which further boosted connectivity.
- Infrastructure strengths:
  - One of the largest and most sophisticated ports in the world.
  - An airport that facilitates air cargo with the latest technological solutions for storage of perishable and sensitive materials.
  - The world’s first single window system to support trade facilitation and streamline issuance of permits.
- Public-private engagement:
  - Authorities encouraged direct involvement of the private sector in public decision-making.
  - Public investment projects have been subject to an extensive consultation process to ensure they meet the business sector’s needs and can induce private investment in complementary infrastructure.

### Where does Panama stand relative to Singapore and global ports
- Panama’s connectivity is at the top in the region:
  - Two busiest ports in the region.
  - Tocumen International Airport as the regional air-transport hub.
  - Many important telecommunication/internet optical fiber cables passing through the Canal.
  - Numerous multinational companies have chosen Panama for HQs of their (regional) operations.
  - A dynamic financial center can provide impetus to strengthen synergies across sectors.
- Trade agreements: Panama has concluded over a dozen free-trade agreements that cover trade relations with over 40 countries and territories (including with Singapore).
- Panama’s expanded Canal:
  - Opens opportunities for emerging activities, such as LPG and LNG vessels, which are among the fastest-growing user segments, and may have spillovers to related industries.
  - Could support further development of Panama’s ports and logistics industry, provided it does not cannibalize such activity as the larger vessels transit directly from source to destination, especially between Asia and North America.
  - Continued improvements in infrastructure and capacities to offer new services are likely key to maintaining and enhancing Panama’s position as an attractive destination for logistics and distribution.

### Port performance and shipping connectivity
- Panama has narrowed its gap in container traffic and shipping connectivity relative to the world’s major ports:
  - Total container traffic through Panama’s ports is about one fifth of Singapore’s.
  - Panama’s growth has been significantly faster than Singapore’s over the last decade.
  - Panama has narrowed its connectivity gap relative to the world’s top ports over the last decade according to the World Bank’s liner shipping connectivity index, though it still lags behind all 5 top ports.

### Logistics Performance Index (LPI) and remaining gaps
- Panama’s improvement in logistics performance over the last decade has established a competitive advantage as a logistics hub compared to neighbors in Latin America, though still significantly behind Singapore.
- The Logistics Performance Index suggests Panama’s progress since 2007 was broad-based, with improvement in:
  - Logistics quality and competence.
  - Cross-border shipments.
  - Infrastructure.
  - Customs.
- Panama narrowed its gap relative to Singapore in areas relevant for logistics performance, such as cross-border shipping, infrastructure, and logistics quality and competence.
- Significant gaps remain in most logistics segments, including:
  - Customs efficiency.
  - Timeliness.
  - Tracking and tracing.
  - Infrastructure.

### Policy areas to transform Panama into a global logistics hub
- Key policy areas include:
  - General strengthening of institutions.
  - Enhancements in the education system and infrastructure quality.
  - Strengthened contract enforcement.
  - Better capacities to absorb new technologies.
  - Promotion of a culture of paying taxes.
- Effective measures in these areas are likely to:
  - Boost Panama’s opportunities in other economic sectors.
  - Create synergies.
  - Help Panama continually re-invent its business model.

### Tourism: role, performance, and competitiveness
- Importance of tourism:
  - WTTC estimates tourism’s total contribution to output is a sizeable 17 percent of GDP.
  - Tourism is estimated to account for about 12 percent of total employment.
  - About 3 percentage points of the contribution of tourism to employment is directly related to jobs in hotels and restaurants and other tourist activities; the remainder is associated with supply-chain effects.
- Source markets and trends:
  - Almost 60 percent of tourists originate from Latin America and the Caribbean.
  - South America accounted for 46 percent of total arrivals in 2015, Central America 10 percent, and the Caribbean 2 percent.
  - South America’s market share expanded rapidly from 2006 to 2013 and partially reversed course beginning in 2014; in 2015 South American tourists still accounted for 11 percentage points more of total tourist arrivals than in 2006.
  - The U.S. accounted for 17 percent of tourism to Panama in 2015; the U.S. market share declined about 10 percentage points since 2006.
  - Data on country of origin covers only passengers arriving through Tocumen airport and excludes cruise passengers and passengers arriving by land; passengers arriving by land represent 6 percent of total arrivals.
- Characteristics of tourism demand:
  - Leisure travel dominates visitors’ motivation.
  - Business travel, including for conventions, has traditionally been important; a new convention center nearing completion is expected to increase this segment.
  - Tourism remains concentrated in Panama City; over 40 percent of tourist accommodations are located in Panama City.
  - Average tourist stay: about 8 and a half days.
  - Average daily spending: about US$270 a day or over US$2300 for the duration of their stay.
- Competitiveness and costs:
  - Panama remains an affordable travel destination according to the ‘Week-@-the-Beach’ (W@tB) Index.
  - Panama compares favorably in price to Central and South American destinations and the tourism-dependent Caribbean, though differences across tourism products may distort comparisons (Panama City shopping vs. high-end beach resorts).
  - Panama’s REER appreciation, driven largely by the appreciation of the U.S. dollar, has diminished price competitiveness for tourism.
- Recent performance:
  - Total tourism arrivals declined in 2016 relative to earlier years due to the regional recession in Latin America and the appreciation of the U.S. dollar.
  - Hotel occupancy rates at 52 percent in 2015 are low, primarily reflecting historical over-investment in hotel room stock, particularly in Panama City, rather than only the downturn in arrivals.
  - Despite the decline in arrivals, tourism receipts rose.

*Source: wp17150 - conclusion of aviation agreements with over 130 states and territories. At the same time, the (PDF).*

### 5.6 percent, down from 12.8 percent in 2015. As a result, Panama continued to grow its market

### wp17150 - 5.6 percent, down from 12.8 percent in 2015. As a result, Panama continued to grow its market

### Tourism performance and market share
- Panama’s tourism growth rate recorded "5.6 percent, down from 12.8 percent in 2015."
- Panama continued to grow its market share of total tourism expenditure in Latin America and the Caribbean, both in leisure and business tourism.
- Relative to tourism competitors in CAPDR, Panama’s market share has been stable since 2012.
- Panama: Tourism Arrivals (3-month moving average; year-over-year; in percent) show monthly volatility (chart references Jan-13 to Jan-16 with series for Visitors and Transit).
- Panama: Market Share in Tourism (in percent of regional tourism expenditure) compared CAPDR, Latin America (right axis), and Latin America and the Caribbean (right axis) for 2006–2016.
- Panama: Nominal and Real Effective Exchange Rates (Index: 2010=100; +appreciation) series include values shown from 2010 through 2016 (examples of index points presented: 92, 97, 102, 107, 112, 117, 122, 127 for 2010–2016).
- January 2017: W@tB Index― Expedia (3-5 star hotel average, Bahamas = 100) presents regional comparisons (Region average, Caribbean, Americas, Europe, Asia, Africa, Australia).

### Opportunities to strengthen Panama’s tourism sector
- Comparative advantages identified:
  - (1) Strategic geographical position that has transitioned Panama into a regional transportation hub.
  - (2) An advantageous climate and diverse ecosystem combined with a major metropolitan area attractive to a diverse tourism clientele.
- Connectivity and transiting passengers:
  - Tocumen airport is a regional hub, but only about "10 percent of travelers transiting through the airport visit Panama."
  - Tourists spend an average of "US$270 a day"; capturing even a small share of transiting passengers could substantially boost economic growth.
  - The ongoing extensive expansion of the Tocumen airport is "expected to be opened in 2018" and will boost airlift supply.
  - Evidence cited: Acevado and others (2015) show airlift expansion is the most effective way to boost tourist arrivals on a sustained basis.
  - Policy lesson example: Iceland increased tourism by marketing itself as a stopover destination through strategic airline partnerships, including free stopovers.
- Cruise segment and infrastructure:
  - The opening of the expanded Canal provides an opportunity to grow the cruise segment.
  - To develop the cruise segment successfully, supporting infrastructure will need to be put in place.
  - Positioning Panama as a home port through development of a new cruise terminal could yield significant benefits.
- Product diversification and inclusive growth:
  - Tourism remains concentrated in Panama City despite Panama’s diverse ecosystem suitable for beach and eco-tourism.
  - Diversifying tourism requires enhancing connectivity within Panama to develop tourism outside Panama City.
  - Recommended two-pronged strategy:
    - Strengthen marketing efforts of Panama’s diversified tourism product.
    - Encourage development of tourism operators outside Panama City.
  - Development of the cruise industry may have spillover effects, enabling new excursions and supporting product diversification.
  - Diversifying beyond Panama City can support inclusive growth and help reduce significantly higher poverty rates in rural areas.
  - Diversification may also encourage diversification of Panama’s main tourism markets and reduce spillovers from developments in individual tourism source markets.

### Policy recommendations and strategic priorities
- Leverage Tocumen’s hub status to convert transiting passengers into visitors (capture more than the current "about 10 percent" who visit).
- Coordinate airport expansion (opening "expected to be opened in 2018") with tourism promotion and airline partnerships (e.g., free stopovers) to increase stopover tourism.
- Invest in cruise-supporting infrastructure and consider developing a new cruise terminal to position Panama as a home port.
- Improve internal connectivity to promote beach and eco-tourism outside Panama City and enable geographic diversification of tourism.
- Strengthen marketing of diversified tourism products and support development of local tourism operators to serve new segments.
- Pursue policies that ensure tourism expansion supports inclusive growth and reduces rural poverty.

### Conclusions (sector implications in broader growth strategy)
- Panama is well-placed to maintain a business model founded on competitive advantages in international financial, business, and transportation services.
- Key structural reforms to further cement competitiveness:
  - Improve the quality of education.
  - Strengthen governance.
  - Reduce bureaucracy.
- The most important challenge: advance reforms to the education system to supply workers with skills demanded by a modern service-based economy.
- Panama shares characteristics with Singapore (favorable geographical location, economic and political stability, a network of free trade agreements, and established port and airport connectivity) and can draw lessons from Singapore’s transition into a global logistics hub.
- The expanded Canal could support further development of ports and logistics, provided it does not cannibalize port activity as larger vessels transit directly between Asia and North America.
- The tourism industry has high potential for growth given Panama’s connectivity; capturing transiting passengers and developing the cruise segment are highlighted as immediate opportunities.
- Diversifying tourism beyond Panama City (beach and eco-tourism) can support inclusive growth and reduce rural poverty.

*Italicized source attribution: IMF Working Paper wp17150 (content unit provided).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17150.pdf_