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International Monetary Fund. Asia and Pacific Dept
International Monetary Fund. Asia and Pacific Dept

IMF Country Report No. 23/430

International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper explores policy options, and strategies for addressing climate change in Palau. Adaptation can be very effective at reducing the cost of sea-level rise, but it requires careful planning and a balanced mix of protection and planned retreat. In order to be effective and efficient, adaptation to climate change must be an integral part of development planning. With many competing needs, the government must carefully allocate resources across all possible uses, including adaptation to climate change, while considering the distributional effects of its programs. Palau’s conditional mitigation targets are ambitious. Palau can continue to drive investments toward renewable infrastructure and explore complementary policies. With the introduction of a new solar farm, Palau is expected to increase its renewable generation share to 20 percent in the near future. Carbon pricing can also play a role in reducing emissions, raising revenues, and driving the transition. Palau’s effective carbon price on diesel and gasoline are high compared to other island economies. With Palau’s reliance on imported goods and tourism, the global mitigation agenda may affect Palau’s economy.
International Monetary Fund. Asia and Pacific Dept
The 2023 Article IV Consultation discusses that Palau has emerged from the pandemic with significant output loss, elevated public debt and historically high inflation. Adverse demographic trends, high dependence on tourism and external support, and vulnerability to climate change risks raise vulnerabilities. The authorities successfully enacted a fiscal responsibility framework and modernized the tax system. Baseline projections assume the approval of Compact Agreement in FY2024. A gradual rebound in tourism is expected to support the recovery. Fiscal policy should remain prudent over the near-term in view of the uncertain economic recovery and higher debt and create fiscal space over the medium-term. Financial sector policies should focus on improving financial sector supervision to preserve financial stability while addressing payment system challenges. Structural policies should aim to diversify the economy and the tourism sector, enable private sector investment, and attract foreign direct investment, including by streamlining processes, improving the regulatory framework, and land-use planning. Climate change policies need to be integrated into development planning, with significant adaptation costs projected over the medium-term.
International Monetary Fund. Asia and Pacific Dept

1. The Republic of Palau is heavily dependent on tourism and external support, and vulnerable to climate change risks. The country’s small size limits scope for diversification, with tourism constituting about 40 percent of GDP and 25 percent of employment pre-pandemic. Island’s dispersion and geographical isolation make Palau vulnerable to external shocks. Palau is heavily dependent on grants, primarily under a Compact of Free Association Agreement with the United States. While still subject to approval in the U.S. Congress, the signing of the new Compact Review Agreement (CRA-23) on May 22, 2023, under better financial terms, improves macroeconomic prospects (Annex I).

International Monetary Fund. Asia and Pacific Dept

Selected Issues

International Monetary Fund. Asia and Pacific Dept

Republic of Palau: Staff Report for the 2023 Article IV Consultation—Informational Annex