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International Monetary Fund. Asia and Pacific Dept

iIMF Country Report No. 21/263

International Monetary Fund. Asia and Pacific Dept
This 2021 Article IV Consultation discusses that the coronavirus disease 2019 pandemic and related containment measures have severely affected the economy in the Republic of Palau. The economic contraction is estimated to have deepened in FY2021, and a gradual recovery is expected in FY2022 as tourism activities resume. While Palau’s public debt remains sustainable, the economic fallout of the pandemic and the cost of the fiscal response have led to a sharp deterioration of the fiscal position and a rapid increase in public debt. The high share of concessional loans from multilateral creditors in Palau’s external debt is an important risk-mitigating factor. Palau is vulnerable to climate change and natural disasters. Economic policies should focus on supporting the recovery, rebuilding fiscal resilience, and supporting sustainable growth post pandemic. The paper also recommends accelerating structural and financial sector reforms to help lift medium-term growth and promote a more resilient economy post pandemic, including through investment in climate resilient infrastructure and diversification within and outside the tourism sector.
International Monetary Fund. Asia and Pacific Dept

1. Palau is a small state in the Pacific that relies heavily on tourism and foreign grants. Tourism-related sectors represented more than a third of GDP in FY2019. Since independence in 1994, Palau has benefited from grants under a Compact of Free Association with the United States for infrastructure investment, budget support, and to establish a Compact Trust Fund (CTF). President Surangel S. Whipps, Jr. was elected in November 2020 as the 10th President of the Republic of Palau. Palau’s legal tender is the U.S. dollar and its fiscal year ends in September.

International Monetary Fund. Asia and Pacific Dept

69Our Palauan authorities appreciate the constructive and frank dialogue with staff during the 2021 Article IV consultations. They agree that the staff report provides a fair assessment of the macroeconomic challenges posed by COVID-19 and the policy response to date. The policy recommendations are well received by the authorities and will be taken into consideration as they develop their inclusive and sustainable growth recovery strategy.

Ali Alichi, Mr. Ippei Shibata, and Kadir Tanyeri
Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.
International Monetary Fund. Asia and Pacific Dept

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Palau

International Monetary Fund. Asia and Pacific Dept
This Article IV Consultation discussions with the Republic of Palau focused on ensuring long-term fiscal sustainability, making potential growth more resilient and sustainable, and preserving financial stability and facilitating credit extension. The consultation discussions also highlight that the main economic policy priorities for Palau are to develop a medium-term fiscal framework and strategy to help manage fiscal risks and the expiration of the Compact grants, to raise public investment, to protect social spending, to make growth more resilient and sustainable through other reforms, and to preserve financial stability and integrity. The current fiscal policy approach is based on the legal requirement to maintain a balanced or surplus cash flow for various parts of the budget. While this fiscal policy strategy has resulted in overall budget surpluses and a decline in net debt, the move to a medium-term fiscal framework and strategy would help Palau to address future challenges.