Appendix I: Palau: Summary of Annexes
Under a 50 year Compact of Free Association with the United States signed in 1994, Palau will receive $450 million in “Compact grants” over the first 15 years.
Real activity estimates are based on tourism, investment, employment and other indicators used to extrapolate GDP. Palau has not had official national accounts data since 2001. Balance of payments figures are sketchy.
Preliminary import data for FY06 and FY07 show a very large decrease in imports in FY07. A possible explanation is the front-loading of imports for a major investment project which would argue for an averaging of imports over these two years.
The CTF is managed according to international best practice by Merrill Lynch and is among the better governed among Pacific Islands, with regular reporting requirements to its board and congress.
PSB was the second largest bank in Palau with 20 percent of deposits. The bank was placed in receivership in November 2006, and performing assets are in the process of being sold. The process is expected to be wrapped up by end-2008.
The March 2008 joint mission of the IMF and the Asia Pacific Group on Money Laundering found that the amendments strengthen Palau’s AML/CFT framework, but several legislative deficiencies remain. Moreover, enforcement is insufficient due to lack of human and financial resources.
A Selected Issues paper explores fiscal sustainability using an intertemporal budget framework.
Inclusion of the unfunded liabilities of the pension fund and fiscal arrears would only serve to increase the required adjustment. The unfunded liabilities of the civil service pension fund exceed 25 percent of GDP, and are poised to increase given its negative annual cash flow. Fiscal arrears, mostly to public enterprises, have declined but remain above 2½ percent of GDP.
A Selected Issues paper explores options for revenue enhancing tax reform.
The 2007 Tax Review Task Force proposed 8 new taxes, which in staff’s view would overburden tax administration and create distortions.
The tariff structure has five nonzero bands, with most imports subject to a 3 percent rate. The unweighted average tariff is just under 3 percent.
The negative list includes tour operators, as well as all retail and wholesale businesses. Foreign investors seeking to operate in these fields must have a local partner, but there is widespread circumvention of the law, with locals (so-called “fronts”) selling the use of their name to foreign businesses.
Specific recommendations—in line with the AsDB’s 2007 Private Sector Assessment—include: (i) securing property rights by accelerating land titling and dispute resolution, and introducing secured transactions legislation; (ii) harmonizing labor laws to remove the bias against local labor; (iii) reducing the negative list for foreign investment to encourage high value added tourism and eliminate the use of transfer pricing to avoid taxation; and (iv) strengthening the legal framework to ensure contract enforcement.
Under the law, titling should be completed by February 11, 2009. At present, just over 5,100 land title certificates have been granted, of an expected 15,000–20,000 lots. There is a backlog of over 2,000 cases waiting to be heard by the land court. Disputes over ownership or demarcation of boundaries delay about one- fourth of all cases.
The current legal framework is based on pre-1953 U.S. Common Law. Key legislative priorities include a uniform commercial code, bankruptcy law, and privacy protection law, as well as arbitration.