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IMF Country Report No. 16/328
REPUBLIC OF PALAU
2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF PALAU
October 2016
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2016 Article IV consultation with Palau, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its September 9, 2016 consideration of the staff report that concluded the Article IV consultation with the Republic of Palau.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 9, 2016 following discussions that ended on May 31, 2016, with the officials of the Republic of Palau on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 24, 2016.
An Informational Annex prepared by the IMF.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2016 International Monetary Fund
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REPUBLIC OF PALAU
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
August 24, 2016
Key Issues
Context. Palau is a middle-income micro state in the Pacific (population: 18,000) that relies heavily on tourism and grants, and is exposed to natural disasters. The economy grew strongly at 9.4 percent in FY2015 led by robust tourism and construction activity, but the surge in tourist arrivals strained infrastructure and was tilted to low budget tourism. The fiscal position has improved, but further efforts are needed to ensure long-term fiscal sustainability. The outlook is favorable although subject to significant downside risks. The discussions focused on:
Ensuring long term fiscal sustainability
Further fiscal adjustment is needed to ensure self-sufficiency when the Compact grants expire in FY2024. This should include both revenue and expenditure measures, with the composition of expenditure tilted towards preserving infrastructure investment.
The fiscal framework should be boosted by targeting a public sector net worth position as the fiscal anchor and using the current fiscal balance as an operational target.
Public financial management should be strengthened to limit fiscal risks. Some public entities need to be reformed to limit their losses and reduce government subsidies.
Increasing potential growth and resilience
Protecting the environment and positioning Palau as a high-end tourism destination requires adopting a broad strategy for sustainable tourism development, and limiting hotel developments until infrastructure has been upgraded.
Appropriate infrastructure planning is needed to support the rapidly growing tourism industry and enhance resilience to natural disasters and climate change.
Preserving financial stability and facilitating credit extension.
Banks remain sound and well supervised, but financial supervision should be extended to other financial institutions. Staff welcomes the authorities’ plan to expand financial supervision to the National Development Bank of Palau.
Banks continue to lend little domestically. Easing the interest rate ceiling on commercial loans and helping small and medium size enterprises to prepare business plans would help domestic financial intermediation.
Approved By
Patrizia Tumbarello (APD) and Bob Traa (SPR)
Discussions took place in Koror during May 18–31, 2016. The mission team comprised Mr. Guajardo (Head, APD), Ms. Raga (APD), Ms. Sian (SEC), and Mr. Usui (Asian Development Bank). Mr. Cafrine (OED) also participated in the discussions. Ms. Kanyabutembo and Ms. Liu (both APD) provided excellent research and administrative assistance. The team met with President Remengesau Jr., Minister of Finance Sadang, other senior government officials, and representatives of Congress, private sector, and donor community. A press release at the end of the mission was published on May 31, 2016.
Contents
CONTEXT
CURRENT DEVELOPMENTS, OUTLOOK AND RISKS
KEY POLICY ISSUES
A. Ensuring Fiscal Sustainability
B. Raising Potential Growth and Enhancing Resilience
C. Preserving Financial Stability and Facilitating Credit Extension
D. External Sector Assessment
STAFF APPRAISAL
FIGURES
1. Real Sector Developments
2. Tourism Sector Developments
3. External Sector Developments
4. Fiscal Sector Developments
TABLES
1. Selected Economic Indicators, 2013/14–2020/21
2. Medium-term Outlook, Baseline and Reform Scenarios, 2013/14–2020/21
3. Balance of Payments, 2013/14–2020/21
4. National Government Operations and Balance Sheet, 2013/14–2020/21
5. Deposit Money Banks Balance Sheet, 2009/10–2014/15
APPENDICES
I. Risk of Natural Disasters
II. National Marine Sanctuary
III. Staff Policy Advice, 2014 Article IV Consultation
IV. Tourism Developments
V. Risk Assessment Matrix
VI. Long-Term Fiscal Sustainability Analysis
VII. Public Sector Debt Sustainability Analysis
VIII. Tourism Strategy
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REPUBLIC OF PALAU
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
August 24, 2016
Prepared By
The Asia and Pacific Department
(In consultation with other Departments)
Contents
FUND RELATIONS
IMF–WORLD BANK COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE (PFTAC)
STATISTICAL ISSUES
Front Matter Page
Press Release No. 16/461
FOR IMMEDIATE RELEASE
October 19, 2016
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