Asia and Pacific > Palau, Republic of

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International Monetary Fund. Fiscal Affairs Dept.
Upon the authorities’ request, the IMF’s Fiscal Affairs Department provided technical assistance to Palau on reforming government employment and compensation policies. Palau is facing significant challenges in recruiting and retaining qualified staff for essential public services due to emigration. The government's compensation structure has become increasingly compressed, making it difficult to recruit and retain skilled workers, particularly in the health and education sectors. The mission suggested that targeted pay increases, subject to available fiscal space, could alleviate these issues. Additionally, innovative approaches, such as merging some state government functions with the national government and facilitating the recruitment of foreign workers, could improve public service delivery efficiency. The recent establishment of the Employment and Compensation Committee (ECC) marks a significant step towards the necessary development of a medium-term strategy to address these challenges.
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
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 COVID-19 pandemic and related containment measures have severely impacted the economy. Border closure and the suspension of commercial flights curtailed tourist arrivals. Real GDP contracted by 9.7 percent in FY2020, notwithstanding policy support. 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.
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
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.
International Monetary Fund. Asia and Pacific Dept
This 2016 Article IV Consultation highlights that Palau’s economy has performed well in recent years. The economy grew strongly in FY2015 (ending September 30, 2015) at 9.4 percent, with tourist arrivals and construction activity expanding by 35 percent. However, the rapid rise in tourism activity strained infrastructure and was tilted toward low budget tourists, which led the authorities to limit the number of charter flights in FY2016. The outlook for Palau is also favorable. Economic growth is expected to slow temporarily to zero in FY2016 as tourist arrivals decline, but to rebound to 5 percent in FY2017 as tourism activity recovers with the entry of new hotels and construction picks up.
International Monetary Fund
This paper proposes a further six-month extension of the period for consent to increase quotas under the Fourteenth General Review of Quotas. The current deadline is due to expire on December 31, 2015, however, Board of Governors Resolution No. 66-2 provides that the Executive Board may extend the period for consent as it may determine. An extension under Resolution No. 66-2 will also extend the periods of consent for quota increases under the 2008 Reform of Quota and Voice (Resolution No. 63-2) and the Eleventh General Review of Quotas (Resolution No. 53-2). As of December 14, 2015, 21 members have not yet consented to their proposed quota increases under Resolution No. 66-2 (see Appendix I). Once the conditions for effectiveness of the individual quota increases are met, members may then pay for their quota increases to make them effective.