This Selected Issues paper and Statistical Appendix describes Palau’s financial sector, its recent performance, and developments in regulatory reform. The paper considers illustrative scenarios of possible outcomes for public spending levels and growth under different assumptions with respect to future grants and the long-term value of government assets held in the Compact Trust Fund. Sensitivity of the results to the rate of return on assets is considered. The paper also covers recent fiscal performance, revenue and expenditure reforms, and some financing issues.
This 2005 Article IV Consultation highlights that Palau’s economic growth has picked up in recent years while inflation has been low. After several years of slow growth, real GDP grew by 5 percent in FY2004 and FY2005, driven by a steady increase in visitor arrivals with the start of new airline routes and hotels. Economic prospects in the near term remain upbeat but are uncertain in the longer term. Tourism will continue to be a main source of near-term growth while ongoing externally financed large infrastructure projects will support construction and other services.
Real output growth of the Republic of the Marshall Islands appears to have slowed sharply in FY2003 and again in FY2004. The 2005 Article IV Consultation highlights that the economic activity has been hampered by delays in implementing an upgraded public works program and the closure of a large privately owned tuna processing plant. The fiscal position deteriorated in FY2004. This deterioration reflects, on the revenue side, a decline in grants aimed at infrastructure projects owing in part to delays in initiating projects, lower income tax collection, and volatility in nontax revenue.
The staff report for the 2004 Article IV Consultation on the Federated States of Micronesia (FSM) focuses on economic developments and policies. Fiscal and structural reforms are needed for the FSM to achieve self-sufficiency. The large government sector will be increasingly unsustainable given coming declines in grants. Fiscal adjustment will need to comprise both expenditure cuts and revenue measures. Structural reform priorities should include improvements to the legal framework for land use, foreign investment, and lending.