PANAMA

The Republic of Panama is a Presidential Republic. According to the 1972 Constitution (last amended in 2004), executive power is vested in the president and two vice presidents, elected by direct popular vote for five-year mandates. The first vice president acts as chief executive in the absence of the president, and both have votes in the Cabinet Council. Legislative power is vested in a unicameral legislative National Assembly (Asamblea Nacional), composed of 67 members, each of whom has an alternate. Members and their alternates are elected concurrently with the presidential elections, for five-year mandates.

Panama is a unitary country with a single tier of subnational government, composed of municipalities. Article 232 of the 1972 Constitution acknowledges the autonomy of municipal governments, and the 1973 Law No. 9-106 on the Municipal Regime (Ley No. 9-106 Sobre Regimen Municipal) establishes municipal categories, autonomy and structure. The first local elections were held in 1984. There are also 10 provinces acting as deconcentrated entities.

The first decentralisation law was introduced in 2009 (Ley No. 37 Que Descentraliza la Administracion Publica), to define the main principles of decentralisation and local governance, establish categories of municipalities and list their responsibilities. However, it was suspended by the following government before it was fully implemented. Decentralisation was reintroduced in 2015, with the passing of Law No. 66, which updated and amended the original law. The 2015 Decentralisation Law sought to build municipal capacity, by increasing municipal revenue with the expectation that municipalities would gain new competences. It also established a National Secretariat for Decentralisation (SND).

In 2013-2014, an integrated development plan for indigenous communities was drafted (Plan Nacional de Desarrollo Integral de Pueblos Indígenas de Panamá), based on a dialogue between Panama’s indigenous communities, the government, the United Nations and the Catholic Church, and which calls for establishing a National Council for the Development of Indigenous Communities in Panama. In July 2018, the National Council for the Integral Development of Indigenous Peoples (CNDIPI) was created, attached to the Ministry of Government, as a consultative and deliberative body on public policies aimed at indigenous peoples. It gathers state agencies (central and municipal) and traditional organisations of the indigenous peoples, with the aim to guarantee the respect and validity of the Indigenous Rights and the multiculturalism of the Panamanian State. The Council is permanent and its decisions are included in the implementation of the Comprehensive Development Plan for Indigenous Peoples.

In December 2019, a new Government Strategic Plan (Plan Estratégico de Gobierno or PEG) was approved until 2024. In accordance with the provisions of Law 34 of 2008, each administration, within the first six months of its mandate, must prepare and approve a PEG framed within the objectives and goals that arise from the National Agreement. The current PEG includes an economic and social strategy made up of five strategic pillars: Good Governance; Rule of Law; Competitive Economy that generates jobs; Combat Poverty and Inequality; Education, Science, Technology and Culture. With regard to multi-level governance, the PEG establishes the creation of the National Decentralization Authority, which was completed in September 2020, complying with the 2015 Decentralization Law, to support municipal governments in the preparation of Municipal Development Plans and Territorial Planning, as instruments for the comprehensive management of local economic development.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2020)
81 Municipalities (distritos)
Average municipal size: 53 269 inh.
81			81

OVERALL DESCRIPTION: Panama is divided into a single tier of subnational government, composed of 81 autonomous municipalities (distritos).

The country also comprises three semi-autonomous indigenous regions (comarcas), that are not included in the table above: Embera, Kuna Yala and Ngäbe-Buglé. These three regional comarcas are divided into indigenous settlements. Overall, indigenous territories are organised by ethnic groups and host the majority of the indigenous population of Panama (around 12% of the country’s population). The comarca of San Blas has a distinct form of local government headed by tribal leaders.

MUNICIPAL LEVEL: The 81 municipalities include two indigenous local comarcas embedded within provinces that are considered equivalent to municipalities (Kuna de Madungandi, in the Panama Province, and Kuna de Vargandi, in the Darien Province). Three new municipalities were created between 2015 and 2018 (Almirante in 2015, Santa Fe in 2017 and Cloclesito in 2018). In all three cases, the new municipalities correspond to split from other existing municipalities (Almirante separated from Changuinola, Santa Fe from Chepigana and Cloclesito from Donoso).

Each municipality is governed by a mayor (alcaldia), who enforces ordinances enacted by a municipal council of community representatives, all directly elected for five-year terms. However, the National Assembly may pass laws requiring the appointment of municipal officials by the President under certain circumstances.

Municipalities in Panama are large by international comparison: more than 53 000 inhabitants vs 10 331 inhabitants in the OECD on average in 2020. However, population size varies significantly from 1 411 inhabitants in Taboga to 1.2 million in Panama City. Only 10% of Panamanian municipalities have fewer than 5 000 inhabitants vs 41% in the OECD while 43% have more than 20 000 inhabitants (vs 33% in the OECD on average).

Municipalities in Panama are classified into four categories based on population and density. The bulk of municipalities are categorised as semi-urban (53 municipalities, accounting for approximately 65% of the population), 15 as urban (19% of the population), 11 as rural (13%) and 2 metropolitan areas (representing 3% of the population). The threshold between rural and semi-urban municipalities is 6 000 inhabitants, between semi-urban and urban 40 000 inhabitants and between urban and metropolitan areas is 250 000 inhabitants.

Municipalities are further sub-divided into corregimientos, at the sub-municipal level, of which there were a total of 695 in 2020. Each corregimiento has its own local government, headed by a corregidor, and local council (junta communal) composed of the corregidor, the corregimiento representative to the municipal council, and five selected other residents of the district. Corregimientos are represented on the municipal council as well as on the provincial council. The capital city of Panama is composed of 26 corregimientos.

HORIZONTAL COOPERATION: According to the 1973 Law on Municipal Regime, municipalities can gather in associations that include a council, an administrative structure and their own treasury (hacienda intermunicipal). However, such associations are rare and their application is limited by the lack of fiscal autonomy of municipalities. In parallel, comarcas often cooperate with each other in sectors such as education and healthcare. Cooperation across indigenous and non-indigenous communities is more limited.

STATE TERRITORIAL ADMINISTRATION: There are 10 provinces at the regional level acting as are deconcentrated entities of the central government. They do not have the status of self-government. Each province is led by a governor, appointed by the President, and administered by a Junta Territorial composed of representatives from each line ministry (Art. 249 of the Constitution). Each province has its own Provincial Council, composed of a representative from each corregimiento in the province, which acts as an advisory body to the governor. Provinces do not have the capacity to generate their own revenue and are mainly responsible for implementing the plans and programmes developed by the national government. Their expenditures are funded directly from the central budget, though line ministries, and set annually. As of January 2014, the five former districts west of the Panama Canal split, to form the Panama Oeste Province.

There are wide disparities between urban and rural provinces (particularly Bocas del Toro and Los Santos) in terms of service delivery and living conditions, and even wider regarding comarcas, which are the most disadvantaged areas. Latest estimates indicate that provincial population in 2020 ranges from 1.4% in Darién to 10.9% in Chiriquí and 38.7% in Panama City, raising challenges in terms of infrastructure, amenities and service delivery capacity.

Panama does not have a specific administrative decentralisation law that defines and regulates the competencies of municipalities vis-à-vis the central government. The central government adopted an asymmetric approach for the decentralisation of competences to municipalities, starting with the law no. 37 of 2009 on the Decentralisation of the Public Administration. The law took a gradualist approach and permitted the transfer of responsibilities to local authorities based on an accreditation process, under the supervision of the Secretariat for Decentralisation. This approach was maintained with law no. 66 in 2015 (which amended the 2009 legislation). In addition, the new law improved local investment capacity and enacted a list of additional responsibilities that could be devolved to municipalities receiving transfers from the property and real estate tax collection, ranging from maintenance and improvement of education, healthcare, and delivery of basic services.

Overall, municipalities are responsible for a range of public services divided into specific tasks: urban public services, public transport, security and protection, public education and culture, health services and public provision. The PEG 2019-2024 proposed to strengthen the competencies of local governments in terms of the collection, management and disposal of urban and household solid waste. However, despite their autonomous status, in practice, their responsibilities of municipalities are concentrated on general urban amenities and education, and there are significant disparities in their ability to deliver public services. For example, medical care in Panama is organised in a semi-decentralised way, with the Ministry of Health at the centre of the system and 14 health regions throughout the Panamanian territory, responsible for implementing health policy coming from the central level and managing healthcare services at the local level. In this configuration, municipalities do not play any relevant role.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipalities
1. General public services (administration)	Cemeteries
2. Public order and safety	Citizen security; Fire prevention
3. Economic affairs / transports	Public roads; Parking and transport terminals; Public slaughterhouses and public markets; Support for the agricultural sector; Touristic infrastructure
4. Environment protection	Parks and gardens; Environmental protection; Solid waste collection, management and disposal; Recycling services
5. Housing and community amenities	Zoning; Building permits; Authorisation for public lighting; Telecommunication services; Supply of potable water
6. Health	Health centres
7. Culture & Recreation	Sport fields, areas for recreation; Library services
8. Education	Pre-primary schools; School canteens; Construction of classrooms (support)
9. Social Welfare	Social assistance; Elderly care; Orphanage

Scope of fiscal data: Municipalities and corregimientos.

Ministry of Economy and Finance of Panama

Availability of fiscal data: High

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: Subnational fiscal and financial frameworks in Panama define a high degree of centralisation. The Constitution and 1973 Law on Municipal Regime provide municipalities with the right to receive revenues from taxes, fines and fees, yet they have few resources and their fiscal autonomy is limited. The 2015 Decentralisation Law marked an increase in municipal funding, with the objective of providing them with greater responsibilities in investment and public service provision, through the establishment of two municipal funds for investment and current expenditures, including an equalisation mechanism for inter-municipal solidarity, as well as of Fiscal Offices in each municipality, in order to facilitate tax collection and regulation at the local level. However, local authorities have minimal autonomy regarding spending.

To enhance the accountability of municipalities and corregimientos to the central government and to the citizens, new technological tools are being implemented (GRP - Recursos de Planificación Gubernamental, for the corregimientos, and SIDEM - Sistema Integral de Descentralización, for the municipalities and corregimientos). As of 2017, 30 municipalities have a digitally integrated financial, accounting and administrative system, with which they can automate their taxpayer management and service processes.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	126	0.5%	1.4%	100%
Inc. current expenditure	103	0.4%	1.3%	81.9%
Compensation of employees	54	0.2%	1.9%	43.0%
Intermediate consumption	21	0.1%	1.3%	17.0%
Social expenditure	0	0.0%	0.0%	0.0%
Subsidies and current transfers	22	0.1%	0.9%	17.7%
Financial charges	6	0.0%	0.5%	4.3%
Others	0	0.0%	-	0.0%
Incl. capital expenditure	23	0.1%	1.8%	18.1%
Capital transfers	9	0.0%	1.1%	7.5%
Direct investment (or GFCF)	13	0.0%	3.7%	10.6%

EXPENDITURE: Municipalities in Panama account for a very limited share in total public expenditure (1.4%) and GDP (0.5%), well below the OECD average for unitary countries (27.5% of public expenditure and 12.7% of GDP in 2020), and also far from many other Latin American countries (for instance, in Chile, one of the OECD’s most centralised countries, SNG revenue represented 4% of GDP and 15.1% of total public expenditure in 2020).

Local expenditures are unevenly distributed across municipalities, as the six municipalities located in the province of Panama were responsible for 68% of all municipal expenditure in 2020. In terms of expenditure per capita, they ranged from an average of PAB 11 in the communities of Ngable Buglé to an average of PAB 115 for those in the province of Panama.

DIRECT INVESTMENT: Overall, municipal investment in Panama is very low and represented only 3.7% of total public investment in 2020, well below the OECD average for unitary countries (48.9%). Municipal investment differs widely across municipalities and provinces: it amounted to around 2% of municipal expenditure for municipalities in the provinces of Herrera, Bocas del Toro, Darien, and Los Santos, whereas it represented 12% of expenditure for the municipalities in Panama province. Overall, local investment is concentrated in municipalities in Panama province, which accounted for 86% of total local investment in 2020).

Municipalities derive funding for investment from the funds transferred from the central government, and must submit their investment plan first to citizens for consultation, and then to the National Secretariat for Decentralisation for approval.

More recently, Panama recently enacted Law No. 93 of September 19, 2019 on Public Private Partnerships (PPP Law), in an effort to bolster infrastructure investment and job creation as well as address ongoing public infrastructure needs. The PPP Law will permit the State, autonomous entities, majority-owned State enterprises and municipalities, other than certain excluded government entities, following a public tender process, to enter into agreements with private partners, for the design, construction, repair, financing, exploitation, development, operation and/or maintenance of public infrastructure or the provision of public services, previously identified by the Cabinet Council or that had been included in the Republic’s Five-year Investment Plan.

ⓘ No detailed data available for this country

Subnational governments in Panama contribute primarily to public expenditures in the fields of general urban amenities and education, with some responsibilities in public health, recreation and culture and transport. They have a limited number of services and responsibilities compared to other countries, in particular in the field of education, which is highly centralized, with the Ministry of Education being the governing body of the system. At the regional level, the Regional Directorates of Education operat with functional and administrative autonomy and their own organizational structure, even when they must apply the regulations issued by the Ministry at the central level. Likewise, the amount of their contribution varies across municipalities, and is determined at the national level based on their population and level of socio-economic development.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	124	0.5%	1.7%	100%
Tax revenue	59	0.2%	2.9%	47.8%
Grants and subsidies	45	0.2%	-	36.6%
Tariffs and fees	7	0.0%	-	5.6%
Income from assets	3	0.0%	-	2.4%
Other revenues	9	0.0%	-	7.6%

OVERALL DESCRIPTION: Municipal revenue in Panama is very low (1.7% of total public revenue), and its share in GDP and total public revenue is well below the OECD average for unitary countries (respectively 12.7% of GDP and 27.5% of public revenue in 2020). Most municipal revenues derive from tax revenue (47.8%), which is high by international comparison (in the OECD unitary countries, tax revenue accounted on average for 35.4% of SNG revenue in 2020) while grants and subsidies accounted for 36.6% of local revenue (vs. 53.3% on average in the OECD unitary countries).

Subnational government revenue has been rising since 2014, and particularly 2015 with the reintroduction of the Law on Decentralisation. This increase was expressed through a decrease in the share of tax revenue in municipal revenue, due to the introduction of grants, and particularly current grants, in municipal budgets, often earmarked for specific uses. Prior to the 2015 Decentralisation Law, grants and subsidies accounted for only 6% of subnational government revenue.

There are also strong disparities in terms of municipal revenue across provinces, as municipalities located in the province of Panama concentrated 65% of total municipal revenue in 2020.

TAX REVENUE: Tax revenues are the main source of municipal revenue in Panama, but they represent a low share of national tax revenue. In 2020, they represented 2.9% of total public tax revenue and 0.2% of GDP in 2020 (vs 18.7% of public tax revenues and 4.5% of GDP in OECD unitary countries on average).

According to articles 242-243 of the Constitution, municipal tax revenue is composed exclusively of own-source taxes (there is no tax sharing system). Further development on municipal taxes can also be found in law no. 106 from 1973, amended in 1984, and law no. 38 from 2000 for the City of Panama. Each municipality has its own Tax Code (Regimen Impositivo). Taxes on commercial activities are the main source of tax revenue, representing 62% of municipal tax revenue in 2020, followed by other local taxes including taxes on construction and industrial activities, tax on alcoholic beverages, and on livestock (slaughterhouses), paid to the municipality of the animal’s origin. Property tax, contrary to most countries, is paid at the central level, but is then reallocated to municipalities through funds, even if the the 2015 Decentralisation Law stated that municipalities would collect the property and real estate taxes.

There are strong disparities across municipalities: as an example, tax revenues represent only 7.4% of municipal revenue in Ngabe Buglé, against 70% for municipalities in Bocas del Toro, in 2020.

GRANTS AND SUBSIDIES: There is no particular legal framework regulating transfers from the central government to subnational governments in Panama. In fact, the issue is often left to the discretion of the president, which make them unpredictable. Most of these transfers are earmarked to specific uses. In 2020, 92% of grants transferred to municipalities and corregimientos were current grants, and 8% were capital grants. In addition, grant revenues vary significantly across jurisdictions, as they represented only 4.5% of the revenues for municipalities in Panama Oeste, against 71.3% for the communities of Ngabe Buglé in 2020.

The 2015 Decentralisation Law established two municipal funds, replacing the former National Programme of Local Development (Pronadel). The first fund derives from the property and real estate taxes collected at the central government level by the Ministry of Economy and Finance (Fondo del Impuestos de Inmuebles - IBI). Through this fund, a minimum amount of PAB 500 000 is allocated to each municipality, in the form of quarterly payments, under the supervision of the Secretariat of Decentralization, which applies a “solidarity formula” that seeks to equate the municipalities that receive less PAB 500,000 of gross allocation. This formula is obtained through the total sum of all allocations greater than PAB 500 000 and that allow to identify the municipalities with the capacity to contribute to solidarity. The minimum amount of PAB 500 000 that is transferred to the municipalities is reviewed every two years and said value can be increased but not decreased from the previous value. Urban municipalities are entitled to use 90% of this fund for investment in hard infrastructure, earmarked to municipal services and to specific sectors defined by law (roads, lighting, water, electricity), whereas the remaining 10% can be used for current administrative expenditure. For the other categories of municipalities, the ratio is 75% for investment in hard infrastructure, and 25% for administrative capacity. Finally, 1% of the funds transferred to each municipality goes to the Association of Municipalities of Panama. The fund has an equalisation component, with a solidarity fund (Fondo Solidario) composed of resources from municipalities that receive higher income from the property and real estate tax, which are then reallocated to municipalities below the threshold of PAB 500 000.

In addition, corregimientos receive transfers through the Public Works and Municipal Services programme (Programa de Obras Públicas y de Servicios Municipales), corresponding to a transfer of USD 110 000 to each junta communal. 70% of these transfers can be used, after citizen consultation, for investment projects, and the remaining amount for administrative and operational functions.

OTHER REVENUE: Municipalities can generate revenue from tariffs and fees for the delivery of public services, fines, income from public lands, properties or municipal assets, the extraction of natural resources (wood, sand, stone, clay, coral, etc.) and duties on public performances. Tariffs, fees and property income accounted for 8.0% of municipal revenue in 2020, and other revenue for the remaining 7.6%.

ⓘ No detailed data available for this country

FISCAL RULES: Panama introduced a fiscal responsibility law for the non-financial public sector as a whole in 2002, although it was amended between 2008 and 2014. It sets a limit to the level of public debt and restricts the expansion of the public sector deficit. Subnational governments are subject to fiscal review by the Comptroller General of the Republic. Efforts are currently being made to establish a fiscal council in order to promote accountability and public debate on fiscal policy.

DEBT: Municipalities in Panama have no access to borrowing on their own. At the general government level, Panama’s public debt accounted for 59.8% of GDP in 2020. The public debt-to-GDP ratio has considerably increased in the last years, and more recently mainly due to the COVID-19 pandemic, and has passed the limit established by the fiscal rule (40% of GDP), although it remains significantly less compared to its peak in 1994 (82% of GDP).

TERRITORIAL MANAGEMENT OF THE CRISIS: Panama began the management of the pandemic prior to the detection of the first case (March 9, 2020), which allowed measures to be applied quickly, such as the suspension of classes, strict regulatory measures at the border, the teleworking law (enacting the obligation to work from home for all professions able to do so), dry law (enacting the prohibition to sell and to consume alcohol) along with total quarantine, mobility restrictions, among others. On January 23, 2020, the central government activated the Health Emergency Operations Center (CODES), whose role was to monitor the country's health situation and recommend actions to the government in response to the pandemic. The CODES, led by the Ministry of Health, was the main body in charge of implementing the National Strategic and Operational Plan, which began on January 28, 2020. Between February 17 and 21, the implementation of the National Plan for Risk Communication and Community Participation began, in conjunction with the provincial and district authorities. The state of emergency was declared on March 13, 2020, two months after the start of CODES’ work.

Considering that the Ministry of Health and medical care in Panama are both organized in a semi-decentralised way (14 health regions throughout the Panamanian territory), the management of the health response was implemented in a decentralised manner. On the one hand, to deal with the expected increase in cases, testing was progressively decentralized by installing capacities in the City of David (Chiriquí), later, in the City of Santiago (Veraguas), and then in Azuero. On the other hand, the central government quickly created Community Traceability Control Operations Centers (COCYTC) in the 14 health regions, composed of the Ministries of Security, Health, Social Development and Government, the Social Security Fund and municipal governments, with the aim of designing and guiding virus traceability interventions in the country at the level of health regions. At the regional level, Regional Traceability Centers were also implemented to coordinate the actions of the traceability teams.

SUBNATIONAL EMERGENCY MEASURES TO COPE WITH THE CRISIS: The first measure of economic response to the emergency was taken on March 30, 2020, with the implementation of the "Panama Solidario" plan (Panama Solidarity). The plan consisted in the delivery of vouchers and food boxes to informal workers, unemployed people, and people whose jobs were suspended due to the pandemic. The distribution of the aid was done by local government officials, with no transparency or accountability mechanisms. Also, a bond issue was carried out for USD 2.5 billion, to finance the National Budget. This transaction made Panama the first country in Latin America to successfully enter the international market, in the midst of the pandemic.

Some local governments promoted the use of digital tools in order to guarantee the continuity of public services during the pandemic. The Municipality of Panama, the largest in the country, has enabled a set of municipal procedures and digital payment methods to pay taxes, obtain the Vehicle History Certification, request delivery of a license plate at home, etc, as part of the prevention actions taken to prevent the spread of COVID-19. The Municipality of Panama also launched the "Mental health and occupational well-being plan in the face of the COVID-19 pandemic for municipal public servants of the Mayor's Office of Panama", with the aim of establishing timely interventions in the areas of mental health and well-being, through clinical psychological care and social work through the use of ICTs (tele-assisted mental health). The initiative identifies mental health problems, raises awareness about the use of health protection equipment, personal care and self-care, coping strategies and emotional support.

Communication efforts were also made by local authorities, including governors, mayors and representatives, in order to raise awareness among citizens to assume a responsible attitude towards COVID-19. One of these experiences has been developed in the Corregimiento of Don Bosco, in the District of Panama, in which its authorities, in the face of the emergency caused by the pandemic, activated their community and virtual communication networks, including social networks. On the one hand, their community liaisons helped to identify local needs and transmit them to the authorities, but also to reach the people and families in need. In the District of Pedasí, province of Los Santos, a predominantly tourist area of the country, the Pedasí Humanitarian group was created to provide food and other supplies to people and families in need, to guarantee their well-being at a time when economic activities were completely paralysed.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Municipal public finances were strongly affected by the pandemic. Total municipal revenue fell 27% between 2019 and 2020. All components of municipal revenue recorded decreases in 2020. The two main sources of financing, namely tax revenue and grants and subsidies fell by 21% and 32% respectively.

For its part, municipal expenditures also had to be adjusted in the health context, but were less affected than revenue. In effect, expenses registered a fall of 17% between 2019 and 2020, mainly driven by the significant decrease in direct investment, which fell by 66%, and to a much lesser extent by the decrease in staff expenditure, which fell by 6%. The only spending component that registered an increase was grants and subsidies, which increased by 25%.

ECONOMIC AND SOCIAL STIMULUS PLANS: In a medium and long-term horizon, Panama reached an agreement with the World Bank for a new Development Policy Loan with a Catastrophe-Deferred Drawdown Option on March 2022 for US 100 million, to strengthen the disaster risk reduction agenda in the country. Within this framework, a grant was created to promote territorial development through climate smart activities in rural areas, and another grant was developed to support governance in public infrastructure management.

Additionally, the World Bank also granted in December 2020, a new Development Policy Loan (Panama’s Pandemic Response and Growth Recovery DPF, worth US 300 million), which included policy actions to protect human capital during the pandemic, particularly for vulnerable rural and indigenous populations, as well as policies seeking to strengthen institutions to combat anti-money laundering, improve fiscal management, and implement the Public Private Partnerships (PPP) agenda started with the 2019 PPP Law.