Panamá’s uncertain waters

Right now Panamá is a place to watch. With the approval of the new canal, Panamá could afford the downsizing of its offshore financial services industry when the new canal is done. One cannot help but wonder what kind of deals Panamá will have to make in order to get financing for the canal. Lastly, it has been reported that, although Panamá companies only are taxed on their territorial income, starting in 2007, those companies must report their foreign assets, even though they are not currently taxable. This sounds to me like some taxman drawing up a wish list for later…

But on the other hand, Panamá has a currency arrangement unlike any other in the world. And this requires some scrutiny.
The official currency of Panamá is the Balboa (B/). The Balboa has always been pegged at 1:1 to the US dollar. Further, not one Balboa note has ever been printed. Balboa denominated coins are minted in exactly the same size, shape and value as the US penny, nickel, dime, quarter and half- dollar. In practice, this means that the US dollar changes hands in Panamá as the local currency. In practice, Panamá has always been “dollarized” like the British Virgin Islands, the Turks & Caicos Islands, and more recently, El Salvador and Ecuador. Nevertheless, legally, Panamá’s currency is still the elusive Balboa.
Why does this matter? Because bank accounts in many Panamanian banks can be held in US dollars or Panamanian Balboas. Dollars and Balboas can be exchanged freely at no fee and without any discount. This anomaly allows the P-CMC and the U-SAFI to safely hold their dollar reserves in Balboas. Unlike dollar accounts, Balboas cannot be summarily seized or frozen by US officials in an end-run around Panamá’s bank privacy laws. This is a technicality worth exploiting!

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