## IMF Staff Completes 2021 Article IV Mission to the Republic of Palau

_IMF News, October 8, 2021_

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## Bibliographic details
- Published: October 8, 2021

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### Economic impact and outlook
- Real GDP contracted by 9.7 percent in FY2020.
- Real GDP is projected to further contract by 17.1 percent in FY2021 before rebounding by 9.4 percent in FY2022 alongside a gradual recovery in tourist arrivals.
- Inflation edged up slightly, driven by a rise in food prices; inflation is expected to pick up on the back of elevated international fuel prices before subsiding over the medium-term.
- The large current account deficit is projected to narrow in the medium term as tourism activities gradually recover.

### Pandemic response and near-term policy recommendations
- The authorities have implemented a comprehensive policy response aimed at strengthening healthcare and mitigating economic and social hardship; employment support prevented a notable deterioration of overall labor market conditions.
- Considering the challenging near-term outlook and substantial uncertainty, pandemic relief measures should be extended until the recovery is firmly entrenched.
- Accelerating the execution of the CROSS Act to extend targeted support to still affected households and firms, as envisaged in the FY2022 budget, is appropriate.
- Should downside risks materialize, targeted spending measures that can best reach affected entities should be the first line of defense, with due consideration to debt sustainability.

### Fiscal position, financing, and debt sustainability
- Palau entered the pandemic with a moderate public debt at about 39 percent of GDP in FY2019.
- The negative effect of the pandemic and the cost of the fiscal response have opened a large fiscal financing need, covered by disbursed and planned concessional financing from the Asian Development Bank and leading to a surge in public debt.
- While risks to debt sustainability have increased substantially, Palau’s public debt remains sustainable, helped by the favorable conditions due to the large share of concessional financing.
- Swift public sector reform is critical to contain fiscal risks, including reform of:
  - the Civil Service Pension Fund,
  - the Palau Public Utilities Corporation, and
  - the Social Security Fund.

### Tax reform and medium-term fiscal consolidation
- The IMF team welcomes the approval of the comprehensive tax reform in September 2021.
- The approved tax reform is expected to:
  - improve the efficiency of the tax system,
  - support growth, and
  - contribute to the needed fiscal consolidation in the medium term to lower public debt ratios, reduce fiscal risks, and accommodate higher spending to address climate change and other infrastructure needs.
- The fiscal adjustment associated with the reform would also help improve Palau’s external position.

### Risks and upside scenarios
- Main downside risks:
  - a protracted COVID-19 pandemic and a domestic outbreak, which could derail the recovery;
  - a shortfall of non-Compact capital grants considering Palau’s graduation to high-income status;
  - more frequent and severe natural disasters.
- Upside factors:
  - with most of Palau’s population fully vaccinated, a faster-than anticipated global vaccine rollout and pandemic containment could expedite the resumption of tourism;
  - ratification of a new Compact Agreement with the U.S., currently under negotiation, could boost grant revenues in the medium term, though uncertainty remains regarding the timing and terms.

### Mission details and procedural notes
- An IMF team led by Tidiane Kinda conducted virtual discussions for the 2021 Article IV Consultation with the Republic of Palau during September 22-October 7, 2021.
- End-of-Mission press releases convey preliminary findings; the views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on preliminary findings, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

*IMF Staff Completes 2021 Article IV Mission to the Republic of Palau (Press Release No. 21/292, October 8, 2021).*

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## References

- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Republic of Palau and the IMF](http://www.imf.org/external/country/PLW/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2021/10/08/pr21292-palau-imf-staff-completes-2021-article-iv-mission_