Panama's Economic Reforms Soon to Hit Consumer's Pockets
By Juan Carlos Martinez
Among some of the fiscal reforms implemented by President Ricardo Martinelli's administration is an increase in consumer tax. This tax in Panama is called ITBMS, which roughly translated means transfer tax on goods and services. The tax is equivalent to the European VAT and for many years in Panama it was 5%, the lowest in the region. One of the first reforms made to it a few years ago was that its application became greater as it was imposed on services as well as goods. Now this year it has been increased to 7% versus the previous 5%.
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This means that for all retail goods and services you will now have to add in a 7% tax at the cash register. A word to the wise, Panamanian stores, retailers and service providers do not generally quote the tax in the price marked on a product or when you are given a price so do not be surprised when you are told that something costs $10.00 then at the cash register the tax will be added. In some cases this is just cents however if you are buying a car it makes a huge difference.
This new tax will be effective on the 1st of July of this year. The income received from this tax increase will be used to fund social programs run by the government. Several such programs are the universal scholarship, and the program of 100 for the 70 which is a program that pays people over 70 years old who do not have social security a $100.00 stipend. .
The jury is still out about the effects of this increase on Panamanian spending habits and the overall effect on the economy. The government indicates that they do not expect any adverse effect in consumer spending as this tax only applies to 27% of the monthly consumption on the average Panamanian family, the rest of the consumption is tax-free. Some of the items that are exonerated from the ITBMS are food, medicines, school supplies, uniforms, books, notebooks, basic consumption items such as water, power, among others.
Such fiscal reforms have garnered Panama investment grade ratings from the most important international rating agencies. First was Fitch ratings, then Standard & Poor's and finally a few weeks ago Moody's issued Panama investment grade classification. Moody's upgraded Panama's sovereign debt particularly due of the significant improvement in the fiscal situation spurred by tax reforms implemented by this administration. Panamanian bonds were also upgraded.
The fiscal reforms have improved the financial situation of the government as it expects to receive an additional $200 million per year which is expected to go into sovereign debt reduction which should be reduced to 36% of the GDP from 45% of GDP which is the current situation.
Kudos to Panama for this was the third investment grade rating the Country of Panama had been waiting for as this will help reduce financing costs in the international market and with the ambitious infrastructure investment plan Panama is implementing these ratings will be beneficial.
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