NCPA - National Center for Policy Analysis

Panama's Experience With Dollarization

September 13, 1999

With a number of Latin American countries taking a close look at adopting the U.S. dollar as their currency, the experience of Panama may be instructive.

For 95 years, Panama has used the dollar and avoided the financial perils that have undermined the economies of many of its neighbors.

  • Annual inflation has averaged 1.7 percent for the past 30 years -- lower even than that of the U.S.
  • The economy was largely insulated from the Asian crisis of two years ago -- and has grown 4 percent annually since 1997.
  • Interest rates there are relatively low -- about 9 percent on mortgages and commercial loans.
  • Credit is ample, and government and private bank bonds are classified Ba1 or better.

Experts say this stability is not totally due to dollarization. Rather, it is the result of dollarization coupled with a 1970 banking law that allowed Panama's monetary system to integrate with world financial markets.

The system is characterized by a large number of international banks that are indifferent at the margin between allocating their resources in the local market or abroad. This gives rise to financial integration.

Because money that cannot be loaned prudently within the country flows back out, Panama avoids a buildup of net domestic credit that might otherwise cause inflationary pressure. Even large inflows or outflows of capital have not significantly altered the price level -- unlike the situation in developing countries where the government blocks financial integration and protects local banks from international competition.

Source: Juan Luis Moreno-Villalaz (Panama economic adviser), "Panama: No Central Bank, No Capital Controls, No Problem," Wall Street Journal, September 10, 1999.


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