Republic of Palau: Selected Issues
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
06 May 2014
eISBN:
9781484370964
ISBN:
9781484370964
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English
Keywords:
ISCR; CR; Palau; tax; grant disbursement; gross revenue tax; tax-to-GDP ratio; tax framework; accounts payable; Pacific Islands; government operation
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This Selected Issues paper describes Palau’s fiscal challenges and policy options to achieve long-term fiscal sustainability. Palau relies heavily on compact grants, and without continued fiscal consolidation over the medium term, the fiscal position will become unsustainable after these grants expire in FY2024. The fiscal sustainability analysis uses an intertemporal budget constraint model to show that reducing the current deficit excluding grants by about 8 percentage points of GDP during FY2014–19 would ensure Palau’s long-term fiscal sustainability. The paper also discusses the role of tourism in Palau and identifies policy priorities to further promote this sector and sustain growth.

Abstract

This Selected Issues paper describes Palau’s fiscal challenges and policy options to achieve long-term fiscal sustainability. Palau relies heavily on compact grants, and without continued fiscal consolidation over the medium term, the fiscal position will become unsustainable after these grants expire in FY2024. The fiscal sustainability analysis uses an intertemporal budget constraint model to show that reducing the current deficit excluding grants by about 8 percentage points of GDP during FY2014–19 would ensure Palau’s long-term fiscal sustainability. The paper also discusses the role of tourism in Palau and identifies policy priorities to further promote this sector and sustain growth.

Achieving Long-term Fiscal Sustainability in Palau1

This paper describes Palau’s fiscal challenges and policy options to achieve long-term fiscal sustainability. Palau relies heavily on Compact grants, and without continued fiscal consolidation over the medium term, the fiscal position will become unsustainable after these grants expire in FY2024. This fiscal sustainability analysis uses an intertemporal budget constraint model to show that reducing the current deficit excluding grants by about 8 percentage points (ppt) of GDP during FY2014–19 would ensure Palau’s long-term fiscal sustainability.2 This fiscal adjustment requires comprehensive revenue and expenditure reforms as well as improvements in public finance management.

A. Fiscal Challenges

1. This section summarizes Palau’s main fiscal challenges in light of the expiration of Compact grants in FY2024. It shows that the decline in Compact grant assistance will imply growing reliance on government domestic revenue and deposits and on withdrawals from the Compact Trust Fund (CTF) to finance government expenditure. Meanwhile, domestic revenue is volatile and low compared to other Pacific Island Countries (PICs), and fiscal expense (current spending), particularly the wage bill, is high. In view of these challenges, continued fiscal consolidation is critical to achieve fiscal self sufficiency by the time Compact grants expire.

2. Palau relies heavily on external grants, particularly Compact grants to finance fiscal expenditure. On-budget grants averaged 21 percent of GDP and represented 52¾ percent of total fiscal revenues during fiscal years FY2000–12. Compact grants were renewed in FY2010, but are scheduled to end in FY2024.3 The renewed agreement is pending ratification by the U.S. congress. In the meantime, Palau has been receiving advances for direct economic assistance. Once the agreement is approved, the United States will provide additional grants for infrastructure projects and debt reduction, and also contribute to the CTF over 9–10 years (Box 1). Total assistance under the agreement, including the advances, will amount to US$229 million (98½ percent of FY2012 GDP) by FY2024.4

A01ufig01

Fiscal Revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Palau Ministry of Finance

Palau: The Compact of Free Association1

The Compact of Free Association was ratified in 1994. Under the agreement, the United States gave Palau grant assistance until FY2009 and will continue to provide defense protection in exchange for the right to maintain U.S. military facilities on one-third of the territory, if needed, for 50 years. Total assistance under the Compact agreement in FY1994–09 was about US$580 million.2

In September 2010, the United States and Palau signed an agreement that would provide for additional assistance to Palau. Decreasing assistance, totaling approximately US$229 million through FY2024, includes the following:

  • direct economic assistance (US$122 million) for Palau government operations;

  • infrastructure project grants (US$40 million) to build mutually agreed projects;

  • establishment of an infrastructure maintenance fund (US$27 million) for maintaining the Compact Road, Palau’s primary airport, and certain other major U.S. funded projects;

  • establishment of a fiscal consolidation fund (US$10 million) to assist Palau in debt reduction; and

  • contributions to the Compact Trust Fund (US$30 million).

Currently, the agreement is pending ratification by the U.S. congress, but the U.S. Department of Interior has been advancing about US$13 million annually for direct economic assistance. The revised disbursement schedule shows that the grants could be frontloaded, with large disbursements expected in FY2014 if the agreement is ratified.

1 GAO (2012). 2 The Compact also establishes a basis for U.S. agencies to provide discretionary federal programs related to health, education, and infrastructure.

3. Once Compact grants expire in FY2024, fiscal expenditure will have to be financed mainly by government domestic revenue and deposits and withdrawals from the CTF.5 Moreover, because some projects that are financed by Compact capital grants will be one-time in nature, the government will need to maintain an adequate level of capital expenditure in order to sustain long-term growth. The annual CTF withdrawals will be capped at US$15 million during FY2024–44, and without substantial build up of government assets, the current level of government domestic deposits (at 5 percent of GDP) will not suffice Palau’s remaining fiscal financing needs. Therefore, fiscal adjustment to build government deposits through increasing domestic revenue and/or reducing spending over the medium term is needed.

4. In the meantime, Palau is facing challenges in terms of revenue collection:

  • Volatility: Although Palau’s tax-to-GDP ratio is close to the mid-range of selected small island states, this is largely due to greater departure-tax collections (Table 1). Continued and increased reliance on tourism-related taxes is contributing to revenue volatility and vulnerability to external shocks.

  • Low collection: Income tax and goods and services tax as percent of GDP are among the lowest in the region, which suggest potential areas for Palau to raise revenue over the medium term (Table 1).6 Recent IMF and Pacific Financial Technical Assistance Centre (PFTAC) technical assistance (TA) has found that the current tax framework has a number of weaknesses, including double taxation of exports, effective tax rates that differ significantly between firms with similar profits, and gaps in the tax base that distort activity and lead to unfair outcomes.

Table 1.

Palau: Tax Revenue in Pacific Islands Countries

article image
Source: Country authorities and Fund staff estimates.
A01ufig02

Tax Revenue and Tourist Arrivals

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Palau Ministry of Finance

5. On the expenditure side, a comparatively high wage bill in terms of GDP raises funding needs. About half of fiscal expense goes to the wage bill, and the wage bill-to-expenditure ratio is high compared to other Pacific island countries (PIC). Moreover, during FY2000–12, the ratio of wage bill to revenue was high at 43¾ percent of total revenue and 92½ percent of total revenue excluding grants (domestic revenue). This could become unsustainable once Compact assistance expires and would reduce fiscal space to maintain an adequate level of capital expenditure.

A01ufig03

Wage Bill

(In percent)

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Palau Ministry of Finance
A01ufig04

Fiscal Expense

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Palau Ministry of Finance

6. Low fiscal buffers and weaknesses in budget planning and execution have led to the buildup of domestic accounts payable. For example, budget execution is based on appropriations rather than cash availability, resulting in the drawdown of government domestic deposits and/or the accumulation of accounts payable when revenue collection is lower than budgeted. These accounts payables (mostly in the form of trade credits and late payment to suppliers) doubled from about 7 percent of GDP in average during FY2000–08 to 15 percent in FY2010 as a result of the economic slump brought, among other factors, by the global financial crisis. The government is making efforts to clear domestic accounts payable; however, they remained high at 11 percent of GDP in FY2013.

7. Large loans from development partners to improve infrastructure could pose challenges in terms of debt management. In FY2012, the Asian Development Bank (AsDB) granted Palau a US$16 million loan (7 percent of FY2012 GDP) to improve water and sewer services. In FY2014, the AsDB approved an additional US$28.8 million loan (12½ percent of FY2012 GDP) to help the country make critical investments in sanitation, water, and power, and prioritize maintenance.7 The increase in public external debt could pose challenges in terms of debt management and calls for continued fiscal consolidation as well as strong governance of these projects.

A01ufig05

Government Financial Liabilities

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Palau Ministry of Finance

8. In view of these challenges, continued fiscal consolidation is critical to build fiscal buffers and ensure long-term fiscal sustainability. Furthermore, given the absence of monetary and exchange rate policies in Palau, building adequate fiscal buffers is also crucial to react to any downside risks and sustain external stability. This reinforces the need for comprehensive revenue and expenditure reforms to support the fiscal adjustment.

B. Achieving Long-Term Fiscal Sustainability

9. This section assesses Palau’s long-term fiscal sustainability and derives the conditions to ensure fiscal self-sufficiency when the Compact grants expire in FY2024. The analysis is based on an intertemporal budget constraint model that has been used in previous Article IV consultations, but is updated to incorporate the latest macroeconomic developments and projections.8

Framework and Assumptions

10. The analytical framework is based on the government’s intertemporal budget constraint.9 This framework requires that the government’s net worth plus the net present value (NPV) of future revenue streams equals the NPV of future expenditure streams. This is expressed in the following equation:

W + G + R = C + K

where the government’s net worth (W) and the NPVs of grants (G) and domestic revenue (R) are balanced against the NPVs of fiscal expense (C) and net acquisition of non-financial assets (K).

11. The current balance excluding grants (R-C) is set as the policy variable to balance the budget constraint. The government’s initial net worth (W), grants (G), and capital spending (K) are exogenous. The government’s initial net worth (W) is inherited and comprises the CTF and government domestic deposits, less domestic accounts payable and government external debt. Grants (G) are to a large extent determined by development partners. Capital spending (K) should be maintained at a level that supports growth. In contrast to these three variables, domestic revenue (R) and fiscal expense or current spending (C) can be influenced by policy makers, leaving the current deficit excluding grants (R-C) as the policy variable to satisfy the above equation.

12. The government’s initial net worth is estimated at 60½ percent of GDP at end FY2013. The CTF is estimated at 77 percent of GDP, government domestic deposits at 5 percent of GDP, domestic accounts payable at 11 percent of GDP, and government external debt at 10½ percent of GDP.

13. The following assumptions are made:

  • Nominal GDP growth: 4 percent (real GDP growth: 2 percent).

  • CTF nominal rate of return: 6 percent (real rate of return: 4 percent). The average annual return was 5¾ percent during FY2000–12 and 8 percent since the trust fund’s inception in 1995.

  • U.S. Compact grants: US$146.2 million over FY2014–24 (total direct assistance of US$229 million minus the advances of US$52.5 million received during FY2010–13 and US$30.25 million in contributions to the CTF, which are not part of the government’s budget).

  • Annual drawdown from the CTF: gradual increase from US$5 million to US$13 million during FY2014–23, US$15 million during FY2024–44, and 1¾ percent of GDP thereafter.

  • Other U.S. grants: US$170 million over FY2014–24,10 and 4½ percent of GDP thereafter.

  • Other country grants: 4½ percent of GDP.

  • Acquisition of non-financial assets: ranges between 6¾–9¾ percent of GDP in FY2014–25, and 9 percent of GDP thereafter.

Findings

14. The results show that reducing the current deficit excluding grants (R-C) by 7¾-8½ ppt of GDP would ensure Palau’s fiscal sustainability. This adjustment should take place between FY2014 and FY2023, and it would increase the government’s net worth to a level that will generate sufficient income to finance a sustainable deficit over the long term. However, there is a trade-off between the speed of adjustment and the level of net worth that can be achieved: the longer the adjustment period, the lower the net worth that can be achieved (hence, the lower the sustainable deficit that can be financed).

15. A gradual reduction of the current deficit excluding grants by 8.1 ppt of GDP during FY2014–19 is recommended. Three possible adjustment scenarios (immediate, gradual, minimum) are presented for illustration. The total reduction in the current deficit excluding grants is too large to be implemented by an immediate adjustment in one year. On the other hand, the minimum adjustment that spreads the adjustment until FY2023, just before the Compact grants expire, would be highly sensitive to risks of slippages and adverse shocks like typhoon Bopha in early FY2013, which prevented Palau from continuing on the needed adjustment path. Therefore, gradually reducing the current balance excluding grants by 8.1 ppt of GDP during FY2014–19 (1.35 ppt annually on average) is more appropriate. This gradual approach will leave the government with extra years in case the necessary consolidation is not achieved as planned, which is important in light of Palau’s high vulnerability to external shocks. Since the fiscal adjustment in FY2014 is projected to be 1½ ppt of GDP, the adjustment in FY2015–19 should be about 1¼ ppt a year on average.

Scenarios of Adjustment in Current Fiscal Balance Excluding Grants (R-C)

article image
Source: Fund staff estimates

16. This will bring down the current fiscal deficit excluding grants to 4¼ percent of GDP by FY2019 and, in the process, allow for the buildup of deposits. By keeping the current deficit excluding grants at this level into the long run, the overall balance will continue in surplus until FY2025, allowing the government to build up deposits during this period. Beyond FY2025, and as a result of the expiration of the Compact grants, the overall balance will switch into a deficit, which will gradually increase until reaching a sustainable level of 2¼ percent of GDP in FY2043. This deficit will be financed by drawing from the deposits (and their returns) accumulated during the surplus years. The government’s net worth will reach about 105½ percent of GDP in FY2024 and will continue to increase until reaching a sustainable level of about 120 percent of GDP in the long run, which will also offer an adequate fiscal buffer to address future shocks. The path of medium-term fiscal consolidation and long-term fiscal sustainability is illustrated in Figure 1.

Figure 1.
Figure 1.

Palau: Long-Term Fiscal Sustainability, FY2010–40

Citation: IMF Staff Country Reports 2014, 111; 10.5089/9781484370964.002.A001

Source: Country authorities and Fund staff estimates and projections.

17. The above result is fairly robust to different parameter assumptions. Lower rates of return and lower valuations of the government’s initial net worth (for example, to reflect new external debt and/or to include public enterprise debt) increase the required annual fiscal adjustment. Higher real GDP growth rates and inflation also increase the needed adjustment. Overall, however, reasonable variations in these parameters have fairly small impacts on the estimated annual fiscal adjustment of 1.35.

Sensitivity Analysis under Gradual Adjustment

article image
Source: Fund staff estimates

C. Policy Implications

18. The analysis above shows that Palau could secure long-term fiscal sustainability by pursuing fiscal consolidation over the medium term. The adjustment can be brought about through lower fiscal expense (C) or higher taxes (R) or a combination of both. To the extent that domestic revenue (R) can be raised from its current level throughout the adjustment period, fiscal expense (C) cuts will be smaller. In this context, policies that raise domestic revenue and/or cut fiscal expense would help secure Palau’s long-term fiscal sustainability. In the process, anchoring fiscal policies based on this adjustment path would also isolate the budget from the volatility of tourism revenue and build adequate fiscal buffers to address future shocks.

19. A comprehensive revenue reform, tailored to Palau’s specific characteristics, can address weaknesses and inefficiencies in the tax system and increase fiscal revenue. Implementing a modernized tax system with enhanced revenue-raising capacity requires strong political commitment and involves extensive technical process. Clearly communicating all aspects of such a reform package to engage stakeholders is also critical. As recommended by recent TA by Fiscal Affairs Department (FAD) and PFTAC (Box 2), the priorities should include: replacing the gross revenue tax (GRT) and existing import taxes with a single rate VAT with no exceptions except for exports, moving to c.i.f. (cost, insurance, and freight) valuation for imports, raising the net income tax (NIT) for financial institutions, and expanding it to all taxpayers registered for VAT. The wage and salary tax rate for low income households could be reduced to offset a potential adverse impact of price increases due to VAT adoption. These reforms should increase revenue-raising capacity and address loopholes, double taxation of exports, and other inefficiencies of the current tax framework. In addition, improving revenue administration capacity would be necessary to support such a major reform. If such a reform is not feasible in the short run, removing import tax exemptions; moving to c.i.f. valuation; applying an excise, equivalent to import taxes, on local production of excisable goods; and increasing the NIT rate for financial institutions could be implemented as intermediate actions.

20. Reforms to contain fiscal expense play a critical role. The wage bill-to-revenue ratio is high, especially when compared to other Pacific Island Countries. Containing the wage bill growth below the inflation rate remains the top priority and would help reduce overall fiscal expense in terms of GDP and open up space for maintaining adequate levels of capital spending. In this context, undertaking a well-planned civil service reform, enforcing mandatory retirement, and retraining civil servants could go a long way in improving the effectiveness and efficiency of public service delivery.

21. The above-mentioned reforms would contribute evenly to closing the financing gap. Tax reforms measures, as recommended by the TA, and improvements in nontax administration could raise domestic revenue by 4 ppt of GDP during FY2014–19. Containing the growth of the wage bill below the inflation rate, complemented with civil service reforms, could reduce current spending by 4 ppt of GDP during FY2014–19 while providing adequate resources for capital spending. These combined revenue and expenditure reforms would help achieve long-term fiscal sustainability.

Impact of Fiscal Reforms, FY2014–19

(ppt. of GDP)

article image
Source: Fund staff estimates.

22. Continued fiscal consolidation over the medium term will need to be supported by sustained improvements in public finance management. The recently established budget reserve fund will serve as the basis to manage government deposits that are expected to increase substantially over the medium term. In this context, accountable, transparent, and prudent management of this fund would help safeguard government’s assets. Given the disbursements of new infrastructure loans, sound management of public debt and strong governance of infrastructure projects would help ensure debt sustainability and minimize fiscal risks. Grant disbursements under the Compact’s fiscal consolidation fund should help reduce domestic account payables. However, the authorities should strengthen budget execution and planning to prevent their buildup in the future. Finally, the adoption of a medium-term budget framework is needed to formulate multiyear fiscal policies and strengthen fiscal discipline and transparency.

Palau: Comprehensive Tax Reform—Technical Assistance Recommendations

A technical assistance mission by Fiscal Affairs Department (FAD) and the Pacific Financial Technical Assistance Centre (PFTAC) visited Palau in July/August 2013 to review the government’s tax reform plans and advise on tax policy options, tax administration prerequisites, and the legislation necessary to give effect to the recommended reforms. The recommended tax measures are as follows:

  • Move to c.i.f. valuation for imports.

  • Replace the gross revenue tax (GRT) and import taxes with a value-added tax (VAT) having the following features:

    • ➢ A single rate of VAT in the range of 10 to 15 percent would apply.

    • ➢ Exemptions are kept to a minimum, and exports are zero-rated.1

    • ➢ All government institutions and public enterprises would be subject to VAT.

    • ➢ Businesses with ‘turnover’ (sales) of more than US$300,000 would be required to register for VAT. Other businesses with turnover’ exceeding US$100,000 can register if they meet record keeping requirements.2

  • Reduce wage and salary tax rates for low income households to improve the overall fairness of the system and offset any cost increases from higher consumption taxes.

  • Increase the rate of net income tax (NIT) for financial institutions to around 20 percent.3

  • Expand the NIT to all taxpayers registered for VAT:

    • ➢ A rate of around 20 percent is suggested.4

    • ➢ Retain the current GRT arrangements for international airlines until the impact of VAT and NIT is fully understood.5

    • ➢ Introduce a simple, low rate turnover tax to apply to smaller businesses.6

    • ➢ Exempt micro businesses with a turnover of less than US$40,000 from turnover tax, subject to payment of a business license.

1 Experience from other countries strongly suggests that exemptions and/or reduced VAT rates for basic goods and services should only be considered if targeted expenditure is not feasible. Further, to the extent that foodstuffs are consumed by tourists, the benefits of exemptions and reduced rates effectively flow to non-residents. Instead, a reduction in the wage and salary tax rates for low income residents to improve the overall fairness of the system is preferred. 2 Current GRT data suggest that a threshold of US$300,000 would limit the VAT to the 110 largest businesses, which account for around 90 percent of all sales. 3 Major banks pay tax rates of 35 percent of profit in their home country (mainly the United States), thus effectively transferring the tax to the U.S. Treasury. A higher tax rate would likely be used to offset U.S. tax, and would not significantly impact banks’ incentives to do business in Palau. 4 The suggested rate is among the lowest rates observed in other small island states in the region. Replacing existing GRT and import taxes (excluding alcohol and tobacco) by a VAT rate of 10 percent and a NIT rate of 20 percent would yield a revenue-neutral reform, based on experience in other small island states in the region. 5 It appears that the simple NIT rules may not be robust enough to provide guidance on income and expense allocation for cross-border services in a manner which would replace lost GRT revenue. 6 Because retailers have lower margins than service providers such as professionals, a single turnover tax rate may be unfair. Alignment with the NIT may require two tax rates; one for trading enterprises and a higher one for services.

Appendix 1. Palau: The Intertemporal Budget Constraint1

The analytical framework used for the analysis is based on the government’s intertemporal budget constraint, which states that all present and future government expenditures (wages, goods and services, investment, etc.) must be covered either by the government’s net wealth or by present and future fiscal revenues (taxes, grants, etc.). All expenditures and revenues are discounted to a base-year in order to make payments, which occur at different points in time comparable. In Palau’s case, this can be expressed as follows:

W 2013 + Σ t = 2014 ∞ ( 1 + r ) 2013 − t G t + Σ t = 2014 ∞ ( 1 + r ) 2013 − t R t = Σ t = 2014 ∞ ( 1 + r ) 2013 − t C t + Σ t = 2014 ∞ ( 1 + r ) 2013 − t K t

where W is the government’s net worth, r is the nominal interest rate (assumed to be constant and equal for savings and debt), G is grant revenue, R is domestic revenue, C is fiscal expense, and K is net acquisition of non-financial assets.

The intertemporal budget constraint of the government can be viewed as a financing constraint: fiscal policies that change one of its components will induce a change in at least one other component.

The intertemporal budget constraint can also be stated in terms of current and future generations’ net tax burdens. Specifically, the government’s net debt must equal the sum of discounted net taxes paid by members of living or future generations. In the long term, all government spending must be balanced by the tax payments made by either current or future generations. If present generations do not want to leave the burden of fiscal adjustment solely to their descendants, present as well as future taxes might be increased.

References

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1

Prepared by Rodolfo Dall’Orto (SEC).

2

The current balance excluding grants is defined as revenue less grants and expense.

4

The Compact also establishes a basis for U.S. agencies to provide discretionary federal programs related to health, education, and infrastructure. GAO (2012) estimates that assistance under federal programs will total approximately US$ 211.7 million through FY2024.

5

Under the original Compact agreement, US$70 million were provided to establish the CTF (US$66 million in FY1995 and US$4 million in FY1997). Once the renewed agreement enters into force, the United States will contribute additional US$30.25 million to the CTF over 9–10 years. The purpose of the trust fund is to provide a steady stream of income that would replace Compact grants after FY2024. Once the new agreement enters into force, Palau will be allowed to gradually increase its current annual withdrawals of US$5 million to US$13 million in FY2023, and to withdraw US$15 million from FY2024 through FY2044.

6

A good comparator country is the Cook Islands, a very small tourist-dependent island state where value-added tax (VAT) has operated since the early 1990s. Reflecting the importance of tourism, the Cook Islands collect a comparable amount of departure taxes. Nevertheless, its income tax and goods and services tax performance shows potential areas for Palau to raise revenue over the medium term.

7

The AsDB disbursed US$9.8 million in FY2012, and is expected to disburse US$35 million throughout FY2014–22 under these infrastructure loans. Palau is also negotiating potential loans with the AsDB and the World Bank to develop a fiber optic project that would reduce the cost and increase the availability of information and communications technology services needed to support social and economic development.

8

This section uses the framework found in Lueth (2008) and updated in Appendix I: Palau—Long-Term Fiscal Sustainability of IMF (2012).

9

See Appendix 1 for more information on the intertemporal budget constraint framework.

1

Prepared by Ioana Hussiada (APD).

3

See Box 1. Palau Tourism Sector, Palau 2012 Article IV Consultation, IMF Country Report No. 12/54.

5

Two new hotels are expected to start operation in FY2014.

6

Real effective exchange rate is the exchange rate of the national currency (U.S. dollar in the case of Palau) relative to exchange rates of the main trading partners, adjusted for the effects of inflation in Palau and in trading partners.

7

Other studies on the role of tourism in the economy for example, Hampton et al. (2013), Harrison et al. (2013), Tuifa’asisina et al. (2012), and Pacific Islands Forum Secretariat (2013).

8

The calculation is based on FY2013 employment data from inputs from the Social Security accounts and is approximated by employment in wholesale and retail trade plus transportation and storage plus accommodation and food service activities as a ratio to total employment.

9

In fact, the decline in tourist arrivals in FY2013 was less severe because tourists from China contributed to positive (5 percent) growth while those from other markets contributed to negative (-12 percent) growth.

10

According to Hotels.com (2013), the top five items a Chinese tourist seeks in a hotel is free Wi-Fi, a kettle to prepare tea, mandarin speaking hosts and translated travel guides, smoking rooms, hotel websites translated in Chinese language, Chinese breakfast, etc. In terms of booking and reservations, two in five Chinese travelers use websites or mobile apps to book online and plan their trip. By comparison, according to “Tourism Economics” an Oxford Economics Company, half of European travelers use the internet and/or social networking for their travel arrangements.

11

For example, a simple calculation based on PVA data indicates that an increase in tourism from Japan by 6.5 percent would compensate a 10 percent drop in the number of tourists from Taiwan Province of China in order to maintain the same level of tourist spending.

13

The small share of agriculture and forestry sectors (less than 2 percent of GDP) offers a potential for growth. However, small scale operations, complex land ownership, and limited labor supply pose a challenge.

14

The recent establishment of the Economic Advisory Group comprising representatives from the government, congress, and the private sector would help address these challenges by facilitating better coordination between the private and public sectors.

15

The establishment of the Small Business Development Center to assist small businesses and new entrepreneurs with setting up financial statements and prepare them for the loan application process required by the banks’ regulations is a step in the right direction.

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Cover IMF Staff Country Reports
Republic of Palau: Selected Issues
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2014: Issue 111
Publisher:
International Monetary Fund
ISBN:
9781484370964
ISSN:
1934-7685
Pages:
27
DOI:
https://doi.org/10.5089/9781484370964.002

Fiscal Revenue

(In percent of GDP)

Tax Revenue and Tourist Arrivals

(Year-on-year percent change)

Wage Bill

(In percent)

Fiscal Expense

(In percent of GDP)

Government Financial Liabilities

(In percent of GDP)
Figure 1.

Palau: Long-Term Fiscal Sustainability, FY2010–40