Abstract
This 2001 Article IV Consultation highlights that the Republic of Palau faces a number of development challenges. Substantial improvements in human and physical infrastructure are needed to sustain higher growth rates. About 80 percent of the land area is on the Babeldaob Island, which is virtually inaccessible now, but it is expected to develop rapidly after the completion of a Japan-funded bridge in 2002 and a United States-funded island access road in 2004. Asset balances have been declining as a result of drawdowns to finance fiscal deficits, as well as recent investment losses.
The following information on recent economic and policy developments, which does not change the thrust of the staff appraisal in SM/01/358, has become available since the staff report was issued.
1. The two tax reform bills submitted by the President to the OEK (Palau’s national congress) in October, consisting of tax administrative reform and import tax reform, have been assigned to committees in both houses. The two bills were expected to be approved before the end of 2001 but the process has been delayed. Hearings on these two bills are expected to commence later this month when the OEK resumes its regular session. Every month of delay is estimated to reduce expected tax collections by one-third of a percentage point of GDP.
2. There have also been delays in establishing the Financial Institutions Commission (FIC). Although the President submitted the list of nominees in October, and the OEK has met to review it, their decision has not yet been issued. In the meantime, members of an Interim Financial Regulation Committee are drafting some preliminary regulations and reviewing the re-licensing applications of existing banks with assistance from the Pacific Financial Technical Assistance Centre (PFTAC). The cutoff date for the filing of applications for existing banks was December 17, 2001. Based on the reviews completed to date, two “shell banks,” which were not in operation but had advertised themselves to have been authorized by Palau, have been effectively closed.
3. The number of tourist arrivals declined by about 25 percent in the October-November period compared to the same period of the last fiscal year. This decline was larger than projected in the staff report and is mostly due to fewer arrivals from Japan as the number of charter flights were temporarily reduced. However, there has been a pick up in charter flights from Japan since December and the staffs FY2002 projection of 3 percent growth in tourist activity could be achieved if tourist arrivals increase by an average 8 percent over last year for the remaining months of the fiscal year. This would depend on the continued frequency of both charter and regular flights to Palau and the pace of recovery of tourism in Asia.