IMF Executive Board Concludes 2023 Article IV Consultation with Palau
IMF News, December 21, 2023
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Bibliographic details
- Published: December 21, 2023
Overview
- On December 1, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Palau.
- Press Release No. 23/467; publication date on page: December 21, 2023.
- Palau has emerged from the pandemic with significant output loss, high external debt, and inflation.
Economic developments and outlook
- Real GDP growth:
- FY2022: contraction of 2.0 percent (noting FY2021/22 entry shows -2.0 percent; table entries: 2021/22: -2.0; 2022/23: 0.8; 2023/24: 12.4; 2024/25: 11.9; 2025/26: 3.5; 2026/27: 2.0).
- Economic activity estimated to have stalled, growing by 0.8 percent in FY2023.
- Growth projected at 12.4 percent in FY2024, supported by a gradual rebound in tourism and construction activity.
- Key drivers and constraints:
- Declining construction activity due to delays in implementation of new infrastructure projects offset a modest increase in tourism.
- Slow recovery in tourism since fully lifting border restrictions in July 2022, reflecting lack of flights, tighter travel restrictions in Palau’s source markets in East Asia, and the appreciation of the US dollar.
- Uncertainty and risks:
- Uncertainty elevated around timing of approval of the CRA-23 by the U.S. Congress, strength of tourism recovery, international commodity price volatility, and natural disasters.
- Risks are described as tilted to the downside.
Fiscal policy, Compact Agreement, and public finances
- Compact Review Agreement (CRA-23):
- CRA-23 signed on May 22, 2023, under better financial terms, improving macroeconomic prospects (subject to approval in the U.S. Congress).
- CRA-23 would significantly enhance fiscal resources and present an opportunity to pay down debt while boosting priority social, infrastructure, and climate adaptation spending.
- Fiscal stance:
- After pandemic expansion to support the economy, fiscal policy has been significantly tightened towards its pre‑pandemic balanced position.
- Authorities implemented recent comprehensive tax reforms to enhance revenue mobilization; committed to prudent fiscal and debt policies, supported by the Fiscal Responsibility Act and Debt Management Act.
- Public finance indicators (in percent of GDP unless otherwise specified) — selected table entries:
- Central government Revenue: 2020/21: 57.6; 2021/22: 57.7; 2022/23: 48.9; 2023/24: 51.7; 2024/25: 48.2; 2025/26: 47.5; 2026/27: 47.0
- Taxes and other revenue: 2020/21: 24.0; 2021/22: 22.7; 2022/23: 26.8; 2023/24: 26.9; 2024/25: 25.8; 2025/26: 25.7; 2026/27: 25.6
- Grants: 2020/21: 33.6; 2021/22: 35.0; 2022/23: 22.1; 2023/24: 24.9; 2024/25: 22.4; 2025/26: 21.8; 2026/27: 21.4
- Expenditure: 2020/21: 65.3; 2021/22: 61.0; 2022/23: 48.6; 2023/24: 49.8; 2024/25: 47.6; 2025/26: 47.2; 2026/27: 46.7
- Expense: 2020/21: 56.9; 2021/22: 52.5; 2022/23: 44.1; 2023/24: 41.3; 2024/25: 40.0; 2025/26: 39.9; 2026/27: 39.8
- Net acquisition of nonfinancial assets: 2020/21: 8.4; 2021/22: 4.4; 2022/23: 8.5; 2023/24: 7.6; 2024/25: 7.4
- Current fiscal balance (excluding grants) 2/: 2020/21: -32.9; 2021/22: -29.8; 2022/23: -17.3; 2023/24: -14.4; 2024/25: -14.2; 2025/26: -14.1
- Primary fiscal balance (including grants): 2022/23: 3.7; 2023/24: 1.8
- Net lending (+)/borrowing (–): 2022/23: 0.3; 2023/24: 0.6
- Compact debt service grants 3/: 2022/23: 2.7; 2023/24: 2.5
- General government debt: 2020/21: 70.7; 2021/22: 68.4; 2022/23: 66.2; 2023/24: 53.8; 2024/25: 45.4; 2025/26: 41.7; 2026/27: 37.4
- Compact Trust Fund (CTF) balance: 2020/21: 317.7; 2021/22: 246.6; 2022/23: 266.6; 2023/24: 331.6; 2024/25: 396.6; 2025/26: 412.5; 2026/27: 428.7
Inflation and prices
- Inflation dynamics:
- Inflation increased to historical highs—13 percent during FY2022 and FY2023—driven by higher import prices for food and fuel due to Russia’s war in Ukraine and global supply chain disruptions, the introduction of the Palau Goods and Services Tax (PGST), and one‑off utility tariff adjustments.
- Consumer prices (percent change; period average) from table: 2020/21: -0.5; 2021/22: 13.2; 2022/23: 13.0; 2023/24: 5.9; 2024/25: 2.2; 2025/26: 2.3
- Inflation projected to moderate to 5.9 percent in FY2024 as the impact of one‑off price increases subsides.
External sector, tourism, and external debt
- Tourism:
- Tourist arrivals (number of visitors) — table: 2020/21: 3,412; 2021/22: 9,247; 2022/23: 35,052; 2023/24: 70,509; 2024/25: 91,681; 2025/26: 106,686; 2026/27: 110,954
- Expenditure per Tourist Arrival (US$) — table: 2020/21: 1,261; 2021/22: 1,765; 2022/23: 1,194; 2023/24: 1,241; 2024/25: 1,265; 2025/26: 1,289; 2026/27: 1,315
- Tourism receipts (millions of U.S. dollars): 2020/21: 4.1; 2021/22: 15.4; 2022/23: 37.5; 2023/24: 78.8; 2024/25: 104.6; 2025/26: 124.3; 2026/27: 132.1
- Trade and current account (In millions of U.S. dollars) — selected table entries:
- Trade balance: 2020/21: -127.1; 2021/22: -157.2; 2022/23: -149.0; 2023/24: -171.7; 2024/25: -191.4; 2025/26: -201.1; 2026/27: -206.3
- Exports (f.o.b.): 2020/21: 1.1; 2021/22: 2.1; 2022/23: 3.1; 2023/24: 5.6; 2024/25: 6.0; 2025/26: 6.4; 2026/27: 6.8
- Imports (f.o.b.): 2020/21: 128.1; 2021/22: 159.3; 2022/23: 152.1; 2023/24: 177.3; 2024/25: 197.4; 2025/26: 207.5; 2026/27: 212.7
- Current account balance including grants (millions): 2020/21: -100.6; 2021/22: -134.9; 2022/23: -109.2; 2023/24: -82.1; 2024/25: -75.1; 2025/26: -60.2; 2026/27: -56.9
- Current account balance excluding grants (millions): 2020/21: -159.8; 2021/22: -201.4; 2022/23: -168.6; 2023/24: -155.1; 2024/25: -150.1; 2025/26: -137.3; 2026/27: -136.0
- International Investment Position (millions of U.S. dollars):
- IIP: 2020/21: -172.0; 2021/22: -373.1; 2022/23: -418.4; 2023/24: -373.6; 2024/25: -366.3; 2025/26: -399.7; 2026/27: -423.7
- Assets: 2020/21: 811.7; 2021/22: 687.5; 2022/23: 703.5; 2023/24: 802.7; 2024/25: 857.5; 2025/26: 875.4; 2026/27: 899.7
- Liabilities: 2020/21: 983.7; 2021/22: 1,060.6; 2022/23: 1,121.9; 2023/24: 1,176.2; 2024/25: 1,223.8; 2025/26: 1,275.1; 2026/27: 1,323.4
- Of which: External debt (millions): 2020/21: 164.4; 2021/22: 168.5; 2022/23: 177.6; 2023/24: 168.8; 2024/25: 162.5; 2025/26: 157.2; 2026/27: 146.8
- External debt (In percent of GDP): table rows include entries -43.3; -54.7; -40.7; -26.2; -21.0; -16.0; -14.5 and other percent rows shown in source (preserved in table).
- Balance sheet implications:
- International Investment Position deterioration noted in table across most recent years; external debt levels remain elevated though projected to decline as a percent of GDP.
Financial sector resilience and structural reforms
- Financial sector recommendations:
- Enhance financial sector resilience by further monitoring asset quality as pandemic support measures expire.
- Strengthen financial sector supervision in the National Development Bank.
- Improve the payment system and address structural impediments, including by establishing a credit bureau.
- Cautious approach to Fintech initiatives: close existing gaps in regulatory and governance frameworks and strengthen the country’s AML/CFT framework before exposing the financial system to new risks.
- Financial indicators:
- Credit to private sector (in percent of GDP): 2020/21: 26.3; 2021/22: 25.5; 2022/23: …
- Credit to private sector (percent change): 2020/21: 2.4 (table shows a partial entry).
Executive Board assessment and policy recommendations
- Executive Directors’ broad messages:
- Welcomed the improving economic outlook following significant scarring from the pandemic.
- Commended the authorities for decisive fiscal reform efforts over the past two years.
- Encouraged authorities to maintain prudent policies and reform momentum to secure a sustainable economic recovery while addressing long-term growth bottlenecks and preparing for climate shocks.
- Emphasized continued engagement with development partners and the Fund, including technical assistance.
- Specific recommendations and priorities:
- Maintain prudent fiscal and debt policies; use CRA-23 resources to pay down debt and boost priority spending.
- Continue improving efficiency of public spending, including more targeted social spending.
- Maintain reform momentum in civil service pensions, public sector employment, and wage bill management.
- Improve public financial management and seek IMF capacity building in these areas.
- Enhance financial sector supervision; monitor asset quality; strengthen National Development Bank supervision.
- Improve payment systems; establish a credit bureau; proceed cautiously with Fintech after addressing regulatory, governance, and AML/CFT gaps.
- Reform to enhance the value added of tourism and encourage private and foreign direct investments.
- Integrate climate change adaptation and mitigation into development policy given the criticality of climate risks for Palau.
- Administrative note:
- It is expected that the next Article IV Consultation with Palau will be held on the 24-month cycle.
Key statistics and country facts (from headline and table)
- Nominal GDP for FY2022: US$246 million
- Population (2022): 17,674
- GDP per capita for FY2022: US$13,941
- Quota: SDR 4.9 million
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