IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Palau

IMF News, October 19, 2016

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IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Palau

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Bibliographic details

• Published: October 19, 2016

Recent economic performance

• The Executive Board concluded the Article IV consultation on September 9, 2016.
• Economy grew strongly in FY2015 (ending September 30, 2015) at 9.4 percent, driven by a 35 percent expansion in tourist arrivals and construction activity.
• Inflation declined to 2.2 percent in FY2015.
• The external position improved due to lower commodity prices and higher tourism receipts.
• The current fiscal deficit (current expenditure less domestic revenue) fell from 11 percent of GDP in FY2014 to 5.5 percent in FY2015.
• Public debt remains moderate and sustainable.

Outlook and risks

• Growth projections:
  • FY2016: 0.0 (growth expected to slow temporarily to zero as tourist arrivals decline)
  • FY2017: 5.0 (growth expected to rebound as tourism recovers with entry of new hotels and construction picks up)
  • FY2018: 4.0
  • FY2019: 3.0
  • FY2020: 2.0
• Inflation projected to remain low at 2 percent as commodity prices stabilize.
• Current account and fiscal projections:
  • Current account deficit expected to rise due to larger infrastructure-related imports.
  • Fiscal position projected to improve further on continued spending restraint.
• Key downside risks:
  • Reliance on tourism, grants, and commodity imports.
  • Slowdown in key trading partners.
  • Further U.S. dollar appreciation.
  • Natural disasters and climate change.
  • Higher commodity prices increasing food and fuel import costs.
  • Failure to implement a strategy for sustainable tourism development could reduce medium-term growth.
• Policy response if risks materialize: Palau will have to rely on fiscal and structural policies.

Executive Board assessment and recommendations

• Directors welcomed robust growth and improved fiscal and external positions driven by tourism and construction expansion.
• Directors noted exposure to natural disasters and climate change, and heavy reliance on tourism and grants, underscoring downside risks.
• Emphasis on continued sound macroeconomic policies and structural reforms to:
  • Ensure fiscal sustainability.
  • Preserve financial stability.
  • Boost potential growth.
• Fiscal measures and medium-term needs:
  • Additional efforts needed over the medium term to ensure fiscal self‑sufficiency when the Compact grants expire.
  • Fiscal adjustment should build on revenue and expenditure progress, including:
  • Replacing the gross revenue tax with a value added tax.
  • Reorienting infrastructure investment to support the tourism industry and enhance resilience to natural disasters and climate change.
  • Strengthen the fiscal framework by targeting a public sector net worth position as the fiscal anchor, while using the current fiscal balance as an operational target.
  • Improve public financial management and strengthen the civil service pension system to contain fiscal risks and ensure debt sustainability.
• Financial sector:
  • Banking system remains sound and well supervised.
  • Directors welcomed steps to preserve financial stability and facilitate domestic credit expansion.
  • Encouraged continued efforts to relax the ceiling on credit rates.
  • Encouraged broadening Financial Institutions Commission oversight to include non‑bank financial institutions.
• Structural priorities:
  • Economic diversification and improving the business climate to reduce vulnerabilities and boost potential growth.
  • Develop a comprehensive strategy to ensure sustainable tourism development, supported by adequate infrastructure investment.
  • Improve the regulatory environment and strengthen coordination among national and state governments.

Selected economic indicators and key statistics

• Nominal GDP for FY2015: US$287 million
• Population (2015): 17,885
• GDP per capita for FY2015: US$16,070
• Quota: SDR 3.1 million

• Nominal GDP (million US$):
  • 2013/14: 250.9
  • 2014/15: 287.4
  • 2015/16 Est.: 296.0
  • 2016/17 Proj. 2/: 318.6
  • 2017/18: 341.2
  • 2018/19: 362.0
  • 2019/20: 380.3
  • 2019/21: 395.7

• Real GDP growth (percent change):
  • 2013/14: 4.2
  • 2014/15: 9.4
  • 2015/16: 0.0
  • 2016/17: 5.0
  • 2017/18: 4.0
  • 2018/19: 3.0
  • 2019/20: 2.0

• GDP deflator (percent change):
  • 2014/15: 5.2
  • 2015/16: 4.7
  • 2016/17: 2.5

• Consumer prices (percent change; period average):
  • 2014/15: 2.2

• Tourist arrivals (number of visitors):
  • 2013/14: 125,674
  • 2014/15: 168,767
  • 2015/16: 148,515
  • 2016/17: 158,911
  • 2017/18: 166,857
  • 2018/19: 173,531
  • 2019/20: 178,737
  • 2019/21: 184,099

• Central government (In percent of GDP):
  • Revenue:
  • 2013/14: 43.3
  • 2014/15: 40.6
  • 2015/16: 39.6
  • 2016/17: 41.8
  • 2017/18: 40.8
  • 2018/19: 40.3
  • 2019/20: 39.8
  • 2019/21: 39.4
  • Taxes and other revenue:
  • 2013/14: 24.4
  • 2014/15: 25.4
  • 2015/16: 24.8
  • 2016/17: 25.5
  • 2017/18: 26.1
  • 2018/19: 26.0
  • 2019/20: 25.9
  • 2019/21: 25.8
  • Grants:
  • 2013/14: 18.9
  • 2014/15: 15.3
  • 2015/16: 14.8
  • 2016/17: 16.3
  • 2017/18: 14.3
  • 2018/19: 13.9
  • 2019/20: 13.6
  • Expenditure:
  • 2013/14: 35.6
  • 2014/15: 41.6
  • 2015/16: 42.7
  • 2016/17: 36.7
  • 2017/18: 36.5
  • 2018/19: 36.0
  • Expense:
  • 2013/14: 35.4
  • 2014/15: 30.9
  • 2015/16: 30.3
  • 2016/17: 30.2
  • 2017/18: 30.1
  • 2018/19: 30.0
  • 2019/20: 29.9
  • Net acquisition of nonfinancial assets:
  • 2013/14: 4.4
  • 2014/15: 11.3
  • 2015/16: 12.5
  • 2016/17: 9.5
  • 2017/18: 6.7
  • 2018/19: 6.5
  • 2019/20: 6.1
  • Current fiscal balance (excluding grants) 4/:
  • 2013/14: -11.0
  • 2014/15: -5.5
  • 2015/16: -4.7
  • 2016/17: -4.0
  • Net lending (+)/borrowing (–):
  • 2013/14: 3.5
  • 2014/15: -2.0
  • 2015/16: -0.9
  • 2016/17: 1.2
  • 2017/18: 3.3
  • 2018/19: 3.4

• In millions of U.S. dollars:
  • Compact Trust Fund (CTF) balance:
  • 2013/14: 199.2
  • 2014/15: 183.9
  • 2015/16: 188.9
  • 2016/17: 194.2
  • 2017/18: 201.8
  • 2018/19: 208.9
  • 2019/20: 215.9
  • 2019/21: 222.8
  • Government cash and deposits 5/:
  • 2013/14: 9.6
  • 2014/15: 23.4
  • 2015/16: 30.6
  • 2016/17: 39.1
  • 2017/18: 44.7
  • 2018/19: 52.8
  • 2019/20: 63.0
  • 2019/21: 72.8
  • Government cash and deposits (In percent of GDP):
  • 2013/14: 3.8
  • 2014/15: 8.1
  • 2015/16: 10.4
  • 2016/17: 12.3
  • 2017/18: 13.1
  • 2018/19: 14.6
  • 2019/20: 16.6
  • 2019/21: 18.4

• Balance of payments 3/:
  • Trade balance:
  • 2013/14: -158.2
  • 2014/15: -142.4
  • 2015/16: -148.4
  • 2016/17: -164.8
  • 2017/18: -176.1
  • 2018/19: -177.0
  • 2019/20: -180.8
  • 2019/21: -184.6
  • Exports (f.o.b.):
  • 2013/14: 19.1
  • 2014/15: 14.5
  • 2015/16: 11.9
  • 2016/17: 16.1
  • 2017/18: 17.7
  • 2018/19: 18.7
  • 2019/20: 19.6
  • 2019/21: 20.6
  • Imports (f.o.b.):
  • 2013/14: 177.3
  • 2014/15: 156.8
  • 2015/16: 160.3
  • 2016/17: 179.4
  • 2017/18: 192.2
  • 2018/19: 194.7
  • 2019/20: 199.5
  • 2019/21: 204.2
  • Tourism receipts:
  • 2013/14: 129.3
  • 2014/15: 150.4
  • 2015/16: 139.0
  • 2016/17: 153.2
  • 2017/18: 163.2
  • 2018/19: 172.3
  • 2019/20: 180.1
  • 2019/21: 188.3
  • Current account balance:
  • Including grants:
  • 2013/14: -29.5
  • 2014/15: -1.5
  • 2015/16: -15.6
  • 2016/17: -22.4
  • 2017/18: -28.3
  • 2018/19: -22.8
  • 2019/20: -21.1
  • 2019/21: -19.3
  • Excluding grants:
  • 2013/14: -74.4
  • 2014/15: -42.3
  • 2015/16: -56.1
  • 2016/17: -62.2
  • 2017/18: -66.3
  • 2018/19: -60.6
  • 2019/20: -58.3
  • 2019/21: -55.8

• International Investment Position:
  • 2013/14: 245.4
  • 2014/15: 272.1
  • 2015/16: 280.3
  • 2016/17: 295.2
  • 2017/18: 318.4
  • 2018/19: 345.4
  • 2019/20: 372.9

• Assets:
  • 2013/14: 467.1
  • 2014/15: 511.0
  • 2015/16: 539.4
  • 2016/17: 569.7
  • 2017/18: 599.8
  • 2018/19: 632.2
  • 2019/20: 667.1
  • 2019/21: 702.0

• Liabilities:
  • 2013/14: 221.7
  • 2014/15: 239.0
  • 2015/16: 267.3
  • 2016/17: 289.3
  • 2017/18: 304.6
  • 2018/19: 313.8
  • 2019/20: 321.7
  • 2019/21: 329.1
  • Of which: External debt:
  • 2013/14: 70.6
  • 2014/15: 64.2
  • 2015/16: 77.4
  • 2016/17: 90.0
  • 2017/18: 92.6
  • 2018/19: 88.9
  • 2019/20: 83.7
  • 2019/21: 77.9

• Additional indicators (selected):
  • -11.8
  • -0.5
  • -5.3
  • -7.0
  • -8.3
  • -6.3
  • -5.6
  • -4.9
  • -29.7
  • -14.7
  • -19.0
  • -19.5
  • -19.4
  • -16.7
  • -15.3
  • -14.1
  • 97.8
  • 94.7
  • 91.9
  • 88.0
  • 86.5
  • 90.8
  • 94.3
  • 28.1
  • 22.4
  • 28.2
  • 27.1
  • 24.6
  • 22.0
  • 19.7

Sources: Palau authorities; and Fund 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 tax and other revenue less expense. 5/ Includes unspent external loans.

IMF Communications Department, Press Release No. 16/461 (October 19, 2016).

References

• Republic of Palau and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home