Panama’s official currency is the Balboa. But for 118 years, Panama has used the US dollar as its currency. Panama does have Balboa coins in 1, 5, 10, 25, 50 cent denominations and a $1 dollar coin called a Balboa. The coins are the same size as US coins and are used interchangeably. The coins are actually made in Canada. Panama does not have a central bank so it cannot print money. All dollar bills used in Panama are US dollar bills.
Panama’s economy is completely a market-driven society. They must sell a product or service to make money! Perhaps that is why Panama’s inflation is so low, currently at 1.96%.
We’re often asked if there is concern that Panama uses the US Dollar. I asked my friend Bob Adams of Retirement Wave to chime in on this topic.
The Balboa is only found as a coin and can easily be used exactly the same as US coins at any time. Anyone will be happy to give you US coins for your Balboa coins before you leave. The Balboa is not a “currency” in the sense of the Colon in Costa Rica, the Peso in Colombia, and others like them. That is why Panama has no central bank. The coins are used simply to save money. Shipping and providing security die tons of pennies/nickels/dimes/quarters/half-dollars from the US costs more than just minting some of our own to fill out our supply of coins.
There is a Banking Superintendency to assure that local banks are solvent and operating within legal boundaries. It should be noted that Panama did not spend a single penny of its taxpayer’s money to support or bail out any local bank during the “global financial crisis” as happened in the US, UK, etc. When asked if they needed the support, the banking sector said, “No.”
The Panamanian Constitution forbids the nation from printing its own paper currency. The US dollar was chosen in 1904 for the obvious reason that the Americans were building a canal and bringing in a flood of their currency. Panama can change to any other currency at any time they like, or create their own.
Panama has 118 years of experience operating with the US dollar. Their inflation rate has normally been independent of the US, often lower. No one wants to change currencies. Any politician suggesting that would get ignored at best, but would not win an election. Panamanians have watched other Latin American nations fall into extreme inflation. That has never occurred here. Panamanians appreciate (yes, appreciate) that their politicians cannot print their currency, but the nation must earn every dollar it spends and pay back any loan with dollars earned. Panama would not trade its inflation rate history with any other Latin American nation, or the US.
Should they ever decide that the US dollar doesn’t work anymore, they can change to another currency of their choice and that is what you will pay to use the Canal, warehouse goods at the world’s second-largest free trade zone, purchase copper from one of the largest copper mines in the world, purchase liquified natural gas (LNG) from the largest LNG storage facility in Central America and the Caribbean, and so forth. We will go right on earning our way.
Panama will be affected, of course, but so will everyone else. Wherever you live, we are not interested in trading places. Panama has made it for 118 years through recessions, depressions, wars, market collapses, etc. We can get by for a few more.
Also, see this article from Mises about the benefits of Panama not having a central bank.