Reports on Palau’s economic status released

  03 Jun 2016

Adoption of national tourism policy a priority recommendation

By: L.N. Reklai

June 2, 2016 (Koror) Two papers released this week, reported on Palau’s current economic position, challenges to its medium term economic growth and recommendations to address its challenges.

Pacific Private Sector Development Initiative (PSDI) released a draft Private Sector Assessment for Palau report and the International Monetary Fund (IMF) released its preliminary findings from the 2016 Article IV Consultations with Palau this May. [restrict]

Both reports agree that Palau’s economy has performed well in recent years. “Real GDP grew by 9.4% in 2015 led by robust tourism and construction activity” states the IMF staff report.  PSDI reports “Palau has registered 2 years of substantial economic growth and per capita income has risen to slightly excess of $16,000, the second highest in the Pacific Region.”

Increase in tourism growth in the recent years contributed to  strong performance in the economy according to both reports but IMF staff report further added that falling inflation, drop in commodity prices and spending restrain contributed to Palau’s stronger fiscal position.

Both reports also agree that Palau’s positive economic growth is vulnerable due to its heavy reliance on tourism, external grants and imports.

Sudden increase in tourism arrivals in 2015 that consisted mostly of low budget visitors prompted both reports to recommend implementing a “national tourism strategy” as soon as possible.  “Failure to adopt comprehensive tourism strategy could reduce growth in medium term” according to IMF.  PSDI places development of national tourism policy as first on priority reforms. It further recommends placing a moratorium on new construction of tourist-related facilities until national policy is in place.

Both recommend policies to improve fiscal position such replacing gross revenue tax with value added tax system and improving enforcement of regulations.  IMF further recommends continued reduction of fiscal deficit from 5% to 1% by FY 2022.

Reforms to domestic and foreign investment policies are also recommended. Business laws, according to PSDI, do not contribute to creation of business and fail to assist in development of viable tourism industry.

Both reports recommend relaxing the law that puts an interest rate ceiling on loans to businesses by foreign banks.  This restriction according to both reports, contribute to limited loans being issued to businesses from non-local banks.

PSDI recommends major improvement to State-owned enterprises, especially telecom companies, recommending inviting in more competition such as Digicel to improve telecom services.  IMF recommends that reform to Pension Plan to be more self-sustaining and for other SOE’s to operate at full cost recovery by raising tariff and reducing operational costs.

“In spite of the strong economic performance, a number of pressing problems face Palau, which will require strategic policy decisions that will impact both the economy and society,” PSDI reported on Palau’s Private Sector Assessment.

The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The Pacific Private Sector Development Initiative (PSDI) is a regional technical assistance facility co-financed by the Asian Development Bank (ADB), the Government of Australia, and the Government of New Zealand.

Since 2006, PSDI has been working with ADB’s 14 Pacific developing member countries to improve the enabling environment for business and support inclusive, private sector-led economic growth. Its expert team provides support services in policy and program development, advocacy, legislative and administrative reform, and capacity building. [/restrict]