IMF Executive Board Concludes 2014 Article IV Consultation with the Republic of Palau

Press Release No. 14/200
May 6, 2014

On April 23, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Palau.1

After two years of strong expansion, growth is estimated at around zero in fiscal year 2013 (FY2013, ending in September) owing to declines in construction and tourism. Inflation moderated to 2¾ percent (annual average) in FY2013 thanks to stable international food and fuel prices, and it is expected to stay around 3 percent in FY2014. Growth is projected to increase to 1¾ percent in FY2014 and to 2¼–2½ percent over the medium term driven by the recovery in tourism and infrastructure developments. This modest outlook is subject to downside risks from financial market volatility and growth slowdown in Asia, a U.S. dollar appreciation, natural disasters, and the heavy reliance on food and fuel imports.

The current account deficit deteriorated slightly in FY2013 due to lower tourist arrivals and large reconstruction imports associated with typhoon Bopha, but tourism recovery and moderating food and fuel prices are expected to reduce the deficit in FY2014–15. After worsening slightly in FY2016–18 due to imports related to infrastructure projects, the deficit would narrow to 5½ percent of GDP over the medium term and remain fully funded by grants, loans, and FDI.

The current fiscal deficit excluding grants (fiscal anchor) is estimated to have remained unchanged at 12¼ percent of GDP in FY2013. Tax revenue continued to rise thanks to increases in tourism-related taxes, higher prices in the tourism industry, and improvement in tax compliance, but current spending was larger than budgeted due to natural disasters. In view of the authorities’ intention to contain spending and save additional revenue gains from the recent revenue measures, the current fiscal deficit excluding grants is projected to narrow by 1½ percent of GDP in FY2014, putting the fiscal consolidation back on track. In view of the expiration of Compact grants in FY2024, substantial fiscal adjustment over the medium term is needed to build adequate government deposits and to ensure long-term fiscal sustainability.

Executive Board Assessment

Executive Directors noted that Palau’s near-term outlook is generally favorable but exposed to the risks inherent to the geography and narrow production base of a small island economy. With full dollarization ruling out recourse to monetary and exchange rate policies against adverse shocks, Directors encouraged the authorities to build up fiscal buffers and step up reforms to diversify the economy and develop the private sector.

Directors welcomed the authorities’ commitment to a sustained fiscal adjustment to secure sound public finances once grants under the Compact of Free Association expire in 2024. They supported plans to enact soon a comprehensive tax reform bill which, if complemented by improvements in revenue administration, promises a significant increase in budgetary resources over the medium term. Directors also recommended reforms to contain the growth of current spending as a key element of the consolidation strategy. More broadly, Directors agreed that fiscal adjustment should be accompanied by further steps to improve public financial management, strengthen the pension and social security systems, and ensure that the public utility company achieves full cost recovery in its operations.

Directors considered that promoting private sector development and economic diversification would bolster Palau’s resilience to shocks. Additional improvements in infrastructure, and reforms to strengthen the investment climate, including a more flexible foreign investment regime, would also lift long-term prospects and promote more inclusive growth.

Directors welcomed progress in strengthening financial supervision and preserving the soundness of the financial sector. They noted that broadening financial supervision to include the national development bank and other non-bank financial institutions is essential to preserve the sector’s stability. Directors also encouraged the authorities to further improve their regime against money-laundering and the financing of terrorism.



Palau: Selected Economic Indicators, 2008/09–2014/15 1/

Nominal GDP for FY2012: US$232 million

Population (2012): 17,611

GDP per capita for FY2012: US$13,191

Quota: SDR 3.1 million

 
                 
  2008/09 2009/10 2010/11 2011/12 2012/13   2013/14 2014/15
        Est.   Proj. 2/
 

Real sector

               

Nominal GDP (million US$) 3/

198.2 197.5 217.3 232.3 245.8   258.9 273.1

Real GDP growth (percent change)

-10.7 3.2 5.2 5.5 -0.2   1.8 2.2

GDP deflator (percent change)

4.0 -3.5 4.6 1.3 6.1   3.5 3.2

Consumer prices (percent change; period average)

4.7 1.1 2.6 5.4 2.8   3.0 3.5

Tourist arrivals (number of visitors)

73,365 81,934 103,080 116,856 108,522   112,863 117,377
 

 

 

 

 

 

 

 

 

Public finance 3/

(In percent of GDP)

Central government

 

 

 

 

 

 

 

 

Revenue

39.2 44.2 41.0 41.7 38.0   43.9 40.4

Taxes and other revenue

18.1 19.0 19.8 20.9 21.3   21.6 22.4

Grants

21.1 25.2 21.1 20.8 16.6   22.3 18.0

Expenditure

40.0 45.1 39.8 40.8 37.1   39.0 39.5

Expense

34.6 34.9 33.1 33.2 33.7   32.3 32.3

Net acquisition of nonfinancial assets

5.4 10.2 6.7 7.5 3.4   6.7 7.2
 

 

 

 

 

 

 

 

 

Current balance (excluding grants) 4/

-16.5 -15.9 -13.3 -12.3 -12.3   -10.7 -9.9

Net lending (+)/borrowing (–)

-0.8 -0.9 1.2 0.9 0.9   4.9 0.9
                 
    (In millions of U.S. dollars)
                 

Compact Trust Fund (CTF) balance

144.0 151.1 146.5 169.9 189.6   201.0 214.6
 

 

 

 

 

 

 

 

 

Government cash and deposits 5/

3.8 8.9 6.6 11.1 12.4   17.2 17.4

 

               

Balance of payments 3/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade balance

-80.2 -86.8 -106.4 -114.7 -123.9   -130.2 -137.8

Exports (f.o.b.)

13.8 16.0 18.6 20.9 20.8   19.0 18.0

Imports (f.o.b.)

94.0 102.8 125.1 135.6 144.7   149.2 155.8

Tourism receipts

85.7 84.2 114.9 125.8 128.1   137.2 147.7
                 

Current account balance

               

Including grants

-9.2 -14.3 -8.9 -11.7 -16.1   -14.2 -14.5

Excluding grants

-41.4 -50.1 -44.2 -47.4 -49.9   -49.8 -49.6
                 

International Investment Position

28.6 41.3 39.4 88.7 122.9   137.3 154.0

Assets

327.3 337.2 335.5 394.0 428.5   448.1 466.2

Liabilities

298.7 296.0 296.0 305.3 305.7   310.8 312.1

Of which: External debt

70.4 66.5 62.7 69.1 64.9   63.8 59.8

 

 

 

 

 

 

     

 

  (In percent of GDP)

Current account balance

 

 

 

 

 

     

Including grants

-4.7 -7.2 -4.1 -5.0 -6.5   -5.5 -5.3

Excluding grants

-20.9 -25.4 -20.3 -20.4 -20.3   -19.2 -18.2
         

 

     

International Investment Position

14.4 20.9 18.1 38.2 50.0   53.0 56.4

Of which: External debt

35.5 33.7 28.9 29.7 26.4   24.6 21.9
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

Sources: Palau authorities; and IMF staff estimates and projections.

1/ Fiscal year ending September 30.

2/ Staff projections.

3/ Incorporates the authorities’ revised estimates of GDP and balance of payments, and the audited government financial statements.

4/ Defined as Revenue less Grants and Expense.

5/ Includes unspent external loans.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.



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