Panama Monetary Policy
Panama's monetary system is unique. United States dollar notes
serve as the paper currency and are legal tender in Panama. The
local currency is the balboa, which, since its creation in 1904,
has remained tied to and equal to the United States dollar. Panama
issues only coins corresponding in size and metallic content to
United States coins. No foreign exchange restrictions existed in
Panama in the mid-1980s.
With no need for a bank to issue and protect the paper
currency, Panama did not have a central bank. The National Bank of
Panama (Banco Nacional de Panamá--BNP), a state-owned commercial
bank, was responsible for nonmonetary aspects of central banking.
The BNP was assisted by the National Banking Commission, which was
created along with the country's International Financial Center,
and was charged with licensing and supervising banks. In 1985 the
level of M1 (currency and demand deposits) was US$410 million,
while M2 (M1 plus time deposits) was US$1.95 billion.
In a sense, Panama could not have a monetary policy, because it
lacked the instruments to implement such a policy, such as money
creation and exchange-rate manipulation. In effect, Panama's money
supply was determined by the balance of payments, by movements in
interest rates, and by the United States, which controlled the
number of dollars available for the country's international
transactions.
Panama's monetary system has benefited the country in numerous
ways. The country has enjoyed almost automatic monetary and price
stability. International transactions have been facilitated by the
use of the United States dollar. No short-term transfer problems
are associated with the balance of payments. The foreign exchange
constraint felt by most developing countries has been obviated by
the dollars circulating in the economy and the ability to borrow.
In the late 1980s, the financial system consisted largely of
banking. Panamanian businesses relied relatively little on public
stock or bond issues. No formal stock exchange existed; supervised,
independent brokers handled the limited trading in regulated
financial certificates, stocks, and bonds. In addition, some
insurance companies, savings and loan associations, and unregulated
consumer-finance companies were formed. The country's social
security fund invested in government bonds and various development
projects.
Data as of December 1987
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