Panama’s public debt has ballooned by over $4.48bn in just one year under President José Raúl Mulino, according to data from the Ministry of Economy and Finance (MEF), bringing the total financial commitments of the non-financial public sector to $56.3bn by June 2025. When off-balance-sheet obligations such as public-private partnerships (PPPs), turn-key projects, and debts from state-owned enterprises are factored in, the country's total debt surpasses $62bn.

Despite pledges of austerity, government expenditure continues to rise, notably on the public payroll. According to La Estrella de Panamá, monthly salary costs rose from $414mn in 2023 to $442mn in 2025, equating to over $5bn annually. With a public workforce nearing 250,000 employees in a country of just over 4mn inhabitants, economists warn of a chronic structural imbalance.

In the first quarter of 2025 alone, the fiscal deficit reached $1.34bn, exacerbated by a shortfall in tax collection. Between January and May, the Directorate General of Revenue (DGI) missed its target by $445.8mn, collecting just $3.06bn of a projected $3.51bn. While the government has announced a $1.9bn budget cut, the MEF has yet to clarify where these reductions will fall.

According to Rolando Gordón, Dean of Economics at the University of Panama, the real issue lies in the structural incapacity of current revenues to sustain rising expenditure. “The state borrows simply to cover the budget. Without controlling payroll expansion and increasing revenue collection, debt will continue to grow indefinitely,” he told La Nación.

Meanwhile, former president of the College of Economists, Raúl Moreira, questioned the purpose behind the aggressive borrowing. “If debt were used to stimulate the economy or meet public needs, it might be justified. But it seems more aimed at financing authoritarian governance strategies,” he warned.

Panama’s tax system faces profound inefficiencies. A 2023 bulletin from the DGI revealed a tax gap of over $8bn in corporate income tax and an additional $3bn in VAT. President Mulino acknowledged widespread evasion, admitting “thousands of millions” are lost annually. Finance Minister Felipe Chapman has committed to chasing these sums, though specifics remain vague.

The current fiscal crisis draws stark parallels to Panama’s economic disarray in the 1980s, when political instability triggered capital flight and forced the government to issue commemorative coins for public salaries. Since the 1990s, successive administrations enacted reforms to clean up public finances, renegotiate external debt, and liberalise trade, culminating in Panama gaining investment-grade status in the late 2000s.

However, recent administrations have reversed course, relying on unsustainable borrowing without delivering proportional infrastructure or productivity returns. Credit rating agencies have since downgraded Panama’s outlook, citing deteriorating fiscal discipline.

Panama's public finances now sit at a precarious crossroads, with bloated payrolls, poor revenue collection, and weak oversight raising questions about the country’s long-term economic sustainability.