BOCAS DEL TORO, PANAMA -- After pounding a coconut against the sharp end of a rock for about half an hour, the husk finally gives way. Tearing off the sinewy layers, I smash the exposed shell repeatedly until it cracks. As I drink the sweet milk, I realize that this flurry of activity has been the most physical work I've done since arriving in Panama two weeks ago.

Many of my days have been spent exploring the islands in the Bocas del Toro archipelago, located nearly 550 kilometres northwest of Panama City, in and around the Bay of Chiriqui. The region is fast becoming the country's hot spot, a place where travellers are exposed to an eclectic mix of Latin and Caribbean cultures, long stretches of secluded beaches, lush rain forests and abundant wildlife, including more than 940 species of birds.

The fact that Panama even had hot spots surprised me at first. I had always thought this small Central American country was known for two things: its canal, and its infamous former dictator, General Manuel Antonio Noriega, who is currently serving a 30-year sentence on drug charges in a Miami jail. Today, however, it's being touted among travellers in Central America as the next Costa Rica -- only cheaper and less crowded.

Since the early 1990s, after Mr. Noriega was behind bars, the region's newfound stability has made it an ideal destination for budget-conscious backpackers who want to take advantage of inexpensive hotels and unexplored beaches. In the past few years, however, Panama has been discovered by adventure travellers with a little more cash to spend in the town's cafés, mid-range hotels and more upscale restaurants.

To get to Bocas del Toro, tourists can travel by bus and water taxi for about nine hours ($20, all prices in U.S. dollars), but most opt to pay a little more ($50) and catch a one-hour flight from Panama City to the region's capital city, also named Bocas del Toro. City is perhaps a misnomer in this case. It's really a small town (population 4,020) with a reputation for being laid-back and funky.

A typical day here involves going to the beach, scuba diving or snorkelling in the nearby section of coral reef called Hospital Point, or surfing at the northern tip of the island. Some tourists hike or mountain bike into the surrounding rain forest to check out isolated villages where indigenous tribes still live in thatched huts. Panama's seasons are similar to Costa Rica's, with the dry season running from December to April.

Afternoons are the perfect time to tour through the maze of fruit and vegetable stalls in Bocas's city centre, where you can buy a juicy pineapple for a mere $1.50. (Panama's official currency is the balboa, but the U.S. dollar has been used as legal tender since the early 1900s.) At night, the salt-laced air cools, and travellers and locals migrate to the popular bars for chichi de tamarindos (sweet fruit drinks) or cold Soberana beer.

Of course, all of this activity wasn't going on 500 years ago when the region's most famous visitor sailed in from the sea. It was Christopher Columbus's fourth and final voyage, and he was so struck by Bocas's beauty that he named some islands after himself (Islas Cristobal and Colon). A few centuries later, Bocas became the centre of Panama's banana industry.

Today, the banana crop is still a major export crop, bringing in about $200-million in annual revenue. However the 750,000 tourists who visit Panama each year generate an estimated $600-million. (In Costa Rica, which welcomes nearly 1.5 million tourists annually, the industry is worth more than $1-billion.)

Not only does Panama boast the same natural riches as its northern neighbour, it offers cheaper prices. A mid-range hotel in Costa Rica costs about $60 a night, compared with $40 in Panama. A day-long scuba trip is $75 in Costa Rica, and $50 in Panama. And if you'd rather stay on dry land, renting a bike can also be cheaper in Panama -- about $10 for a full day, half of what it costs in Costa Rica.

"Costa Rica is now getting too expensive and too explored," says Dutch expat Ingrid Lommers, who runs a Spanish school in Bocas town. "The traveller doesn't feel like he or she is discovering something special. In Panama, you can still be a discoverer."

That was certainly the case for Phil Egan and his wife Lisa. The couple spent their last two vacations in Costa Rica, but decided this year that they wanted to exchange that country's crowds and escalating costs for something new.

"Everybody wants to find the next hot spot before it's a hot spot," says Mr. Egan, a Boston-based Internet technologist who is booked into the Al Natural eco-resort. "Being here makes me feel like I'm ahead of the curve."

Located a 45-minute speedboat ride from Bocas town, Al Natural sits on the southern tip of Isla Bastimentos. With only six cozy, waterfront cabanas nestled in the surrounding jungle, it's the ideal location for anyone who wants to get away from it all.

"I want everyone to have the feeling of being alone when they're here," explains the owner, Michel Natalis. "That's the greatest luxury -- the feeling of seclusion."

Mr. Natalis, who is originally from Belgium, began searching for a place to build his eco-retreat more than eight years ago, shortly after he quit his stressful job as an international business lawyer in Manhattan. He travelled all over the world, and nearly gave up -- until he arrived in Bocas del Toro.

"I never left," he says, swaying back and forth in the hammock on the porch of his cabana. "Bocas is a very special place."

As I take in the scene -- waves from the Caribbean Sea pounding against the coral, cries from quetzals and other exotic birds bursting out of the surrounding jungle, children from the nearby Indian village playing games on the beach -- I can see why Mr. Natalis fell under its spell.

Al Natural is an example of the kind of grassroots venture that has helped form the foundation of neighbouring Costa Rica's tourism industry. But while the resort uses solar energy, stores rainwater for its bathrooms, and filters its wastewater, it's the exception in Panama. As with some of its Latin American neighbours, Panama's tourism boom has put a strain on the country's waste-management system. The problem is more evident on the islands in the Bocas archipelago, where garbage collection is more costly. Not all tour operators have the interest or the funds to manage the waste generated by their guests. As a result, garbage produced by locals and foreigners is fouling some of the area's most beautiful beaches.

"They've managed to get something off the ground in terms of a tourist industry," says Leslie Endes, a Toronto-based independent architectural consultant. "But it's a letdown to see the natural beauty spoiled."

The government's Instituto Panameno de Tourismo recognizes the problem, and says it has plans to launch recycling programs, beginning in metropolitan areas such as Panama City.

In addition to environmental costs, some expats who are involved in the tourism industry worry Panama will price itself out of business. "I just hope they don't do in Panama what they did in Costa Rica," says Stephan Goulet, a Montreal native who runs a restaurant in Bocas. "It's too expensive there, and it's too crowded."

Mr. Goulet should know. He lived in Costa Rica for eight years before picking up and moving to Panama in 1998. He lives with his wife and four children in Bocas town, and runs a restaurant called El Pecado Da Sabor (translation: The Sin Gives Taste). Its menu is typical fare for the region -- white rice and beans, and fresh seafood platters of lobster, sea bass and conch.

Before opening for the evening's crowd, Mr. Goulet sits down with me for a beer and chats about how he still misses Quebec, but is fond of his new home. "It's so beautiful here," he says. "It's easy, it's very cool, and very relaxed, you know."

For now, Panama is hanging on to its relaxed vibe, especially in Bocas del Toro. But the growth of the country's tourism infrastructure is picking up speed. In Bocas town, a few hotels capable of housing dozens of tourists are being built. Hippies and backpackers are now eating and drinking alongside more mainstream tourists. Behind the scenes, Bocas's traditional way of life plods onward -- fisherman steer dugout canoes, or cayucos,out to sea each day, and return each evening with the catch of the day; locals walk barefoot across unpaved roads; dogs run free and congregate downtown.

The theme of change is on my mind as I walk around town on one of my last nights in Bocas. There is a group of men playing dominos on a card table under a streetlight. Across the road, construction on one of the new hotels presses on into the evening. Workers are putting concrete stilts in the water. Sparks made by a welding gun light the dark night, like small fireworks, and reflect on the still sea. I wander past and realize I'm watching growth and local tradition do subtle battle just metres from each other.

Panama has long been called the crossroads of the world. Now the country itself is at a crossroads. With its natural beauty less of a secret each day, Panama is gaining recognition as more than just that country with the canal, and is poised to become one of the darlings of the travel world.

If you go

HOW TO GET THERE
Major airlines and some charters offer flights to Tocumen International Airport in Panama City. The smaller airport, Albrook, offers inexpensive flights to domestic destinations. Public and private buses offer service anywhere in the country, and to Costa Rica.

WHERE TO STAY
Al Natural Resort: Isla Bastimentos; phone: (507) 757-9004; Web: http://www.bocas.com/alnatura.htm; e-mail: alnaturalbocas@cwp.net.pa. A cool, laid-back resort in the middle of the National Marine Park. Cabanas start at $80 (prices in U.S. dollars) for the first night and $60 each subsequent night in high season.
Hotel La Veranda: Avenida G & Calle 7, Bocas del Toro town; phone: (507) 757-9211; Web: http://www.laverandahotel.com. Built in 1910, this hotel owned by Canadian Heather Guidi hasn't lost its early 20th-century feel. Room rates start at $25 a night.
Hotel Bahia: Calle 3, Bocas del Toro town; phone: (507) 757-9626; Web: http://www.panamainfo.com/hotelbahia; e-mail: hotelbahia@cwp.net.pa. This hotel's 18 modern guestrooms are an inexpensive place to rest after a day of touring around the islands. Rates start at $35 a night.

WHERE TO EAT
El Pecado da Sabor: Calle 3, Bocas del Toro town. The Quebecois owner cooks up local dishes along with Mexican and Thai selections. Meals run from $7 to $10 (including appetizer, drink and tip).
El Ultimo Refugio: Avendia Sur, Bocas del Toro town. Friendly owners offer a wide selection of Italian and vegetarian dishes, along with seafood staples. The restaurant itself is built over the water, so you can stare out at the sea as you eat. Dinner with a drink and tip costs $8 to $11, .
Don Chicho's: Calle 3, Bocas del Toro town. This restaurant serves up traditional Panamanian fare (rice, beans, meat, seafood) and is always packed with locals. The meals set you back $3 to $6, and the banana cake is out of this world.

INFORMATION
For more information on Bocas del Toro and Panama, visit http://www.panamatours.com; http://www.panamatravel.com or http://www.bocas.com.